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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SUGGESTIONS   FOR   EXAMINING   "ACCOUNTANCY   AND   BUSINESS   MANAGE- 
MENT"—PART  ONE 

1.  The  Preface  is  the  authors'  "platform."  It  discusses  the  point  of  view  from  which 
the  course  of  study  contained  in  the  text  and  the  accompanying  Laboratory  Unit  was  written. 

2.  The  "Introduction  to  Bookkeeping"  supplies  a  topical  development  of  the  beginning 
work,  with  short  exercises  which  permit  of  the  teaching  of  one  basic  principle  or  bookkeeping 
procedure  at  a  time.    See  pages  1  to  47. 

3.  Observe  the  skillful  teaching  procedure  in  this  beginning  work,  which  is  characteristic 
of  the  entire  course.  Note  the  following  steps  under  the  topic  "Recording  Purchases"  on 
page  1: 

(a)  Information — the  statement  of  a  few  facts  of  common  knowledge  in  1(1. 

(b)  Illustration — reproduction  of  a  purchases  bill  and  a  written-up  purchases  book. 

(c)  Interpretation  of  records  illustrated — to  disclose  content  of  the  bookkeeping  record. 

(d)  Investigation  by  means  of  analysis — observe  how  the  analysis  questions  on  page  3 
"draw  out"  information  and  develop  reasoning  about  the  subject  being  considered. 

(e)  Application  and  review — exercise  1,  page  4,  and  accompanying  analysis. 

4.  Pages  47  to  122  provide  instruction  and  exercise  matter  to  correlate  with  Laboratory 
Unit  One,  the  text  matter  furnishing  the  material  for  class  recitations,  and  Laboratory  Unit 
One  the  application  of  accounting  principles  in  a  set  of  books. 

5.  Ledger  account  method.  If  it  is  desired  to  begin  the  study  of  bookkeeping  by  this 
method,  pages  47  to  122 — the  Elementary  Accounting  Section  of  the  text — supply  the  neces- 
sary material.  Notice  how  clearly  principles  are  developed,  the  frequency  with  which  they 
are  restated,  and  the  manner  in  which  their  application  is  stressed. 

6.  Paragraphs  26,  34,  61  and  100  are  examples  of  the  extreme  simplicity  and  clearness  of 
the  language  of  instruction. 

7.  Observe  how  the  division  of  the  text  material  under  topical  headings  adapts  the  book 
to  the  class  method  of  teaching. 

8.  Observe  particularly  the  following  features: 

(a)  Model  Set,  pages  14-15. 

(b)  Three  short  practice  sets  without  vouchers,  pages  16-17,  23-24,  and  40-42. 

(c)  The  simple  and  effective  way  of  making  the  pupil  understand  the  equality  of  debits 
and  credits,  pages  26-28. 

(d)  The  introduction  of  the  journal  at  the  logical  time,  and  the  analogy  between  it  and 
other  books  of  original  entry,  pages  33-36. 

(e)  Gradual  expansion  of  the  content  of  cash  book  entries,  pages  37-40. 

(f)  The  journalizing  exercise  and  the  comparison  of  classified  and  journalized  sets, 
page  46. 

(g)  The  simple  yet  comprehensive  treatment  of  general  ledger  accounts,  the  clear  exposi- 
tion of  the  principles  underlying  account  classification,  and  the  brief  and  simple  statement 
of  rules. 

(h)  The  manner  in  which  rules  are  developed  as  the  natural  outgrowth  of  basic  principles. 

(i)  The  "Construction  and  Interpretation  of  the  Income  and  Profit  and  Loss  Statement," 
pages  100-103;  and  the  corresponding  treatment  of  the  Statement  of  Assets,  Liabilities,  and 
Capital,  pages  105-108,  with  the  accompanying  treatment  of  accounts  by  groups. 

(j)  Closing  the  ledger  through  the  Profit  and  Loss  Summary  Account,  with  separate 
closing  en^PP^ 'clearing"  individual  accounts,  pages  110  114. 

(k)  The  "Recapitulation  of  Principles,"  pages  119-122. 

(1)  The  Review  Exercises,  pages  123-127. 

9.  Finally,  observe  how  the  subject  is  stripped  of  its  traditional  mass  of  complicating 
detail  and  minute  discussions  of  routine  practices  that  are  not  basic.  Note  how  the  text  on 
the  other  hand  gets  immediately  to  the  heart  of  the  subject  in  every  topic  presented. 

THE  H.  M.  ROWE  COMPANY 
Chicago  Baltimore  San  Francisco 


Library 

Graduate  Sch  ol  of  Business  Administration. 

University  of  California 

T.r\a      fin  rfol  qo     9  A  Pol  1  "Prt  v»n  4  t%       • 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/accountancybusin01roweiala 


ACCOUNTANCY 

AND 

BUSINESS  MANAGEMENT 

PART  ONE 


BY 

HARRY  M.  ROWE,  Ph.D. 

ASSISTED   BY 

Harry  M.  Rowe,  Jr. 


Script  by  the  late  C.  P.  Zaner  and  bt  E.  A.  Luppeb 

SOUTHERN  BRANCH 

UNIVERSITY  OF  CALIFORNIA, 

LIBRARY, 
^S  ANGELES.  CALIF. 


•   '1922  EDITION  '  I'-    -\ 


43257 

THE  H.  M.  ROWE  COMPANY 

CHICAGO  BALTIMORE  SAN  FRANCISCO 


In  keeping  with  the  modern  trend  in  business 
.and  in  accounting  practice,  all  rulings  in  books  of 
entry  and  ledger  accounts  in  the  illustrations  in 
this  book  are  in  black  ink.  The  author  recom- 
mends the  discontinuance  of  the  use  of  red  ink 
for  bookkeeping  purposes  in  schools  in  the  interest 
of  efficiency  and  economy. 


Copyright  1922 

BY 

Harry  M.  Rowe 


:•'  ^fWrirut  'prc>tecte'all<>tiLe>tGpyrightable  com- 
ponent parts  of  this  work  and  prohibits  all  unlaw- 
ful use  of  its  composition,  illustrations,  methods, 
et^.  Infringers  will  be  punished  to  the  full  extent 
of  the  law. 


UUS.  Aauun. 
Library 

*  I 

PREFACE 

The  course  of  study  provided  in  "Accountancy  and  Business  Management," 
and  in  the  laboratory  practice  units  which  accompany  it,  is  based  to  some  extent 
upon  the  author's  previous  work,  "Rowe's  Bookkeeping  and  Accountancy." 
However,  a  number  of  important  changes  in  the  teaching  plan  and  in  the  selection 
and  arrangement  of  subject  matter  make  the  present  course  of  study  substantially 
a  new  and  original  work. 

The  most  important  new  features  are: 

(a)  An  Introduction  to  Bookkeeping  at  the  beginning  of  the  text,  in  which  the 
fundamental  concepts  of  accepted  accounting  principles  and  business  operations 
are  presented  in  an  exceedingly  simple  and  logical  manner. 

(b)  The  opportunity  provided  throughout  the  course  of  study  for  teaching  by 
the  class  method  when  this  method  is  preferred.  The  teaching  plan  is  so  elastic, 
however,  as  to  permit  the  instructor  to  exercise  his  personal  preference  and 
judgment  as  to  methods  of  presentation. 

(c)  A  minimum  use  of  the  reference  feature  contained  in  the  author's  former 
works,  with  no  references  to  topics  other  than  those  under  immediate  consideration. 

(d)  The  separation  of  the  material  of  the  text  into  consecutive  parts  to  cor- 
respond with  the  material  in  the  laboratory  practice  units.  Each  part  of  the  text 
and  the  accompanying  practice  unit  can  be  completed  in  one  semester  in  the  high 
school,  or  in  the  equivalent  of  that  time  in  commercial  and  other  schools. 

(e)  The  laboratory  units  are  relatively  short  and  can  be  completed  in  about 
one-half  of  a  semester,  or  the  equivalent  of  that  time  in  the  business  school.  They 
contain  fewer  routine  bookkeeping  transactions,  less  detail  and  repetition  in  office 
practice  matter,  and  consequently  fewer  business  papers  and  forms.  Emphasis 
is  placed  upon  principles  and  the  more  constructive  features  of  accounting  practice. 

(f)  The  inclusion  of  lessons  in  business  management  based  upon  the  transac- 
tions in  the  laboratory  units.  These  lessons  are  really  brief  lectures  on  business 
management  and  administration  which  emphasize,  as  does  the  text,  the  ultimate 
aims  of  the  study  of  accountancy  and  the  more  enduring  educational  benefits  to  be 
derived  from  it. 

Throughout  the  course  the  principles  and  practices  of  the  subject  and  the 
various  steps  taken  in  the  entire  cycle  of  accounting  procedure  have  been  developed 
as  topics  for  study  and  recitation  on  the  lesson  unit  plan  to  the  extent  that  the 
subject  permits  of  this  method  of  treatment.    The  practice  exercises  following 


IV  PREFACE 

each  topic  or  principle  presented  in  a  lesson  arc  short,  and  as  a  rule,  can  be  com- 
pleted easily  within  one  daily  period.  Class  instruction  will  be  supplemented  by 
individual  instruction  to  correct  the  deficiencies  of  students  as  they  develop  in  the 
work  of  the  class.     Individual  instruction  may  be  employed  to  any  extent  desired. 

This  book  is  intended  for  use  in  cbmmercial  courses  in  all  types  of  schools 
teaching  business  subjects  to  beginners.  It  will  prove  to  be  effective  and  entirely 
satisfactory  both  in  the  private  school  and  in  the  high  school  because  of  the  recogni- 
tion which  is  more  and  more  being  given  to  the  greater  efficiency  of  the  class 
method  of  teaching.  N  Its  material  and  teaching  plan  are  adapted  to  the  require- 
ments of  all  students  taking  up  the  subject  for  the  first  time,  regardless  of  whether 
it  is  their  purpose  to  become  bookkeepers,  to  engage  in  business  for  themselves, 
or  to  pursue  advanced  courses  in  accounting  and  business  administration 
leading  to  professional  degrees.  It  emphasizes  principles  and  requires  what 
the  author  believes  to  be  the  minimum  amount  of  practice  work  necessary  to 
provide  the  training  which  the  student  must  secure  to  make  him  vocationally 
efficient  in  his  knowledge  of  the  subject,  no  matter  whether  he  may  desire  to 
follow  the  occupation  of  bookkeeper,  business  manager,  or  accountant. 

Unless  the  principle  is  conceded  that  the  minimum  aim  of  the  bookkeeping 
course  is  to  qualify  young  people  to  start  a  business  career,  there  can  be  no 
justification  whatever  for  teaching  utilitarian  subjects,  and  the  remarkable  growth 
and  development  of  commercial  courses  in  public  and  private  schools,  which  has 
been  the  outstanding  feature  of  educational  progress  in  recent  years,  must  be 
pronounced  a  serious  blunder.  In  face  of  the  insistent  and  ever-increasing  demand 
for  education  which  fits  for  commerce  and  industry,  and  the  esteem  in  which  such 
practical  education  is  held  by  educators  and  the  general  public,  such  a  conclusion 
cannot  be  maintained  successfully. 

The  author's  view  is  that  the  vocational  value  of  a  knowledge  of  book- 
keeping and  accounting  is  merely  the  immediate  object  to  be  served  in  offering  the 
course  to  students  of  business  subjects.  On  the  other  hand,  he  contends  that  if  the 
aim  of  the  bookkeeping  course  were  merely  to  train  for  bookkeeping  positions,  that 
aim  could  not  be  realized  without  at  the  same  time  teaching  students  much  of  what 
constitutes  an  elementary  course  in  business  management.  Such  information 
will  in  any  case  be  absorbed  unconsciously  to  a  considerable  degree  by  pupils  from 
their  study  of  business  transactions  and  their  records  in  books  of  account,  whether 
the  teacher  attempts  to  emphasize  the  broader  aspects  of  the  subject  or  not.  Since 
both  the  educational  and  vocational  interests  of  students  in  high  schools  and 
private  schools  can  be  served  by  a  properly  constructed  course  of  study,  any 
attempt  to  differentiate  between  their  needs  in  the  selection  and  arrangement  of 
text  material  is  unnecessary  and  unwarranted,  and  would  discriminate  against 


PREFACE  V 

those  whose  immediate  interests  may  be  of  a  vocational  character.  Therefore, 
while  the  inclusion  of  bookkeeping  in  the  curriculum  of  any  school  teaching  business 
subjects  to  beginners  is  not  justified  unless  it  does  make  them  vocationally  efficient, 
its  chief  value  lies  in  the  training  it  imparts  in  the  principles  and  methods  of 
conducting  business  enterprises.  No  subject  in  the  commercial  course  is  so 
valuable  as  the  subject  of  bookkeeping  with  respect  to  the  opportunities  and  wealth 
of  material  if  affords  for  teaching  young  people  how  business  is  transacted.  The 
ultimate  aim,  therefore,  of  a  course  of  study  in  this  subject  should  be  to  supply  a 
comprehensive  training  in  the  uses  to  which  accounting  records  and  information  are 
put  by  business  executives  in  managing  and  directing  commercial  and  industrial 
enterprises,  rather  than  to  qualify  merely  for  keeping  a  set  of  books.  Accounting, 
accordingly,  has  been  coordinated  in  this  text  with  business  management,  and  it 
has  been  the  purpose  of  the  author  to  emphasize  the  importance  of  accounting 
as  an  aid  to  intelligent  business  administration. 

Attention  is  invited  to  the  method  which  is  consistently  followed  in  pre- 
senting a  new  topic  for  the  student's  consideration.  Reason  has  been  substituted 
for  rule  in  preparing  the  pupil's  mind  for  that  which  is  to  be  learned.  The  opening 
statement  of  a  few  simple  facts  in  connection  with  the  topic  under  consideration  is 
followed  by  an  illustration  that  is  made  the  basis  of  an  analytical  investigation 
which  discloses  the  principles  to  be  learned.  The  results  of  the  analysis  are  then 
summarized  in  a  statement  of  principles  and  recapitulation  of  facts,  from  which 
a  brief  and  simple  working  rule  is  deduced.  Each  rule  is  essentially  a  summariza- 
tion of  the  instruction  on  the  topic  or  principle  to  which  it  applies. 

In  arranging  the  first  year  course  in  the  high  school,  teachers  will  have  con- 
siderable latitude  in  the  use  to  be  made  of  Part  One  of  the  text  and  of  Laboratory 
Unit  One.  The  Introduction  to  Bookkeeping,  covering  the  first  forty-six  pages 
of  the  text,  is  recommended  by  the  author  as  the  first  work  to  be  given  to  all 
beginning  students.  It  is  estimated  that  it  will  require  approximately  six  weeks 
of  the  first  semester  to  cover  this  material.  The  work  of  Unit  One  may  then  be 
started  and  completed  by  the  end  of  the  first  semester.  If  the  students  are  im- 
mature or  if  it  seems  desirable  for  any  reason  not  to  start  work  on  a  practice  set 
until  the  second  semester,  the  material  in  Part  One  of  the  text  devoted  to  Elemen- 
tary Accounting,  pages  47  to  127  inclusive,  may  be  studied  by  the  class  method 
during  the  remainder  of  the  first  semester.  This  section  presents  the  subject 
according  to  the  ledger  account  method  and  provides  an  elementary  treatment 
of  trial  balances,  statements,  and  the  adjustment  and  closing  of  accounts. 

If  the  first  semester's  work  is  confined  to  Part  One  of  the  text  as  suggested 
above,  Laboratory  Unit  One  will  be  started  at  the  beginning  of  the  second  semester. 
In  this  case  sufficient  time  will  be  available  in  the  second  semester  to  make  an 


VI  PREFACE 

introductory  study  of  Part  Two  of  the  text,  which  treats  of  wholesale  and  partner- 
ship accounting,  as  a  preparation  for  Laboratory  Unit  Two,  which  will  be  used  in 
the  third  semester.  In  like  manner,  there  will  be  time  in  the  third  semester  to  make 
a  preliminary  study  of  Part  Three,  which  is  devoted  to  corporation  accounting,  as 
a  preparation  for  Laboratory  Unit  Three.  This  unit  presents  corporation  and 
genera]  mercantile  accounting,  and  will  be  used  in  the  fourth  semester.  Laboratory 
Unit  Four  treats  of  cost  accounting  for  manufacturers,  and  provides  a  fifth  semes- 
ter's work.  Of  course,  if  Unit  One  is  used  in  the  first  semester,  the  four  units  will 
require  four  semesters  instead  of  five  in  which  to  be  completed.  Thus  the  text 
and  four  units  provide  a  two  year,  or  a  two  and  a  half  year  course,  according  to 
the  manner  in  which  the  material  is  used. 

The  author  also  recommends  that  students  in  private  commercial  schools  be 
started  in  the  Introduction  to  Bookkeeping,  which  should  be  followed  by  the  four 
laboratory  units  referred  to  in  the  preceding  paragraph.  Students  ma;/  be  started 
immediately,  however,  with,  the  work  of  Laboratory  Unit  One  when  it  is  preferred 
to  begin  the  course  with  a  practice  set.  The  importance  of  introducing  the  class 
method  of  teaching  as  it  is  adapted  to  the  subject  matter  of  this  course  is  suggested 
to  teachers  in  private  commercial  schools  in  order  to  realize  as  fully  as  possible  the 
educational  benefits  to  which  all  young  people  who  are  preparing  for  business  fife 
are  justfy  entitled. 

The  recognition  accorded  to  my  previous  works  on  this  subject  by  teachers, 
students,  accountants,  and  the  business  public  encourages  me  to  believe  that  this, 
my  latest  and  perhaps  my  last  contribution  in  this  form  to  the  young  people  of 
the  county  whose  interests  have  always  been  paramount  and  nearest  to  my  heart 
in  all  of  my  educational  activities,  will  be  received  with  the  same  cordial  interest. 

H.  M.  Rowe. 

Baltimore,  1922. 


PART  ONE 

INTRODUCTION  TO  BOOKKEEPING 

RECORDING  PURCHASES 

1.  A  merchant  must  buy  goods  before  he  can  sell  them.  When  goods  are 
purchased,  they  are  usually  accompanied  by  a  bill  which  shows  the  amount  of  the 
purchase.  If  the  goods  are  not  paid  for  at  once,  the  bill  shows  the  amount  the 
purchaser  owes  the  seller.  The  following  illustration  shows  a  bill  received  by 
Mr.  Rogers  for  merchandise  he  purchased  from  Mr.  Walton. 

Illustration  1 — Bill 


CARPE 
GAR 

SOLD 

NTE 
□  EN 
SEE! 

TO 

BALTIMORE,  MD.. £.*?  '. 7. 19 

J-  R-  WALTON                            CUTLERY 

tools                        WHOLESALE  HARDWARE                             paints 

>S                                                                                                                                                                                     VARNISHES 

219  LOMBARD  ST. 

C.    E.    Rogers, 

1220   N.    Charles    St. , 

terms:    30  days                  cifcy 

— 

2    Doz.    Monarch   Hatchets           9.00 

18|00 

96 

• 

50 

3     "              "          Spades              17.50 

52 
26 

50 
00 

10   Gal.    Oriole   Flat    White         2.60 

2.  Notice  that  the  bill  gives  the  date  of  the  purchase,  the  name  and  address 
of  the  purchaser,  the  terms  of  the  purchase,  the  quantity  of  each  item  purchased,  the 
price  of  each  item,  and  the  total  amount  of  the  bill.  "Terms  30  days"  means  that 
this  bill  becomes  due  and  payable  thirty  days  from  its  date.  Bills  are  prepared 
by  the  seller  and  are  received  by  the  buyer.  It  is  from  the  bills  received  by  the 
buyer  that  a  record  of  his  purchases  is  made  in  the  book  which  is  kept  for  that 
purpose.  It  is  called  the  purchases  book,  and  only  this  one  class  of  transactions 
is  entered  in  it. 


2  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

3.  The  following  illustration  shows  Mr.  Rogers'  purchases  book  containing 
the  entries  for  five  purchases  which  he  made  during  the  month  of  July.  Notice 
that  the  total  purchases  are  entered  and  that  the  book  is  ruled  to  show  that  all 
the  entries  of  this  class  have  been  made  for  the  month.  The  first  entry  is  for 
the  bill  shown  in  illustration  1. 

Illustration  2 — Purchases  Book 


ttstSl/r^&^tz^/tseJ  A^t^^L 


Utt^lS 


tit  tyl£i*ut£c^L&. 
C^Ct^-^t^c^yr^ /?.  U-. 


?(. 


22/ 


/¥? 


1±L 


£<2_ 


Note:  The  purpose  of  the  column  to  the  right  of  the  date  column  will  be  explained  later. 

How  to  Interpret  Purchases  Book  Entries 

4.  Refer  to  illustration  1.  Mr.  Rogers'  bookkeeper  would  read  this  bill  as 
follows:  "Mr.  Rogers  has  purchased  from  J.  R.  Walton,  219  Lombard  St.,  a  bill  of 
goods  dated  January  1,  amounting  to  $96.50,  to  be  paid  for  in  thirty  days."  He 
would  pay  no  attention  to  the  fact  that  Mr.  Walton  was  a  wholesale  hardware 
merchant  dealing  in  tools.  Neither  is  the  other  information  on  the  bill  necessary 
to  the  record  of  the  essential  facts  of  the  transaction  with  Mr.  Walton.  If  he  were 
asked  to  write  a  memorandum  of  the  transaction,  he  would  write  it  about  as 
follows:  "Purchased  from  J.  R.  Walton,  219  Lombard  St.,  bill  of  merchandise 
dated  January  1,  terms  30  days,  amounting  to  $96.50." 

5.  By  referring  to  illustration  2  it  will  be  seen  that  all  the  essential  facts  in 
this  statement  are  included  in  the  entry  for  this  bill,  dated  January  2,  the  date  on 
which  it  was  received.  The  items  included  in  purchase  bills  are  omitted  from  the 
entries  because  such  bills  are  kept  on  file  and  can  be  referred  to  for  the  items  at 
any  time.  If  the  bookkeeper  were  asked  when  this  bill  would  become  due,  he 
would  say,  "Thirty  days  after  the  date  of  the  bill,  or  January  31,"  which  means 
that  it  should  be  paid  on  or  before  that  date.  Bills  begin  to  mature  from  the  date 
of  the  bill  and  not  from  the  date  of  their  entry.  In  the  entries  for  the  second  and 
subsequent  purchases  from  the  same  person,  the  address  is  omitted. 


introduction  to  bookkeeping  3 

Analysis  of  Purchases  Book  Record 

6.  Analyze  the  transactions  recorded  in  the  purchases  book  shown  in  illus- 
tration 2  by  answering  the  following  questions.  Write  the  answers  in  the  form 
suggested  in  illustration  3  below.  Mr.  Rogers  is  transacting  the  business  and  the 
transactions  are  to  be  studied  from  his  viewpoint.  In  other  words,  the  student  is 
acting  as  his  bookkeeper. 

ANALYSIS 

1.  What  were  Mr.  Rogers'  total  purchases  for  the  month,  and  how  is  the 
amount  found? 

2.  If  at  the  end  of  the  month  he  had  paid  none  of  these  bills,  how  much 
would  he  have  owed? 

3.  According  to  its  terms,  the  bill  for  the  first  purchase  from  J.  R.  Walton 
was  due  and  payable  in  30  days.    When  was  it  due? 

4.  What  were  the  due  dates  of  the  bills  entered  on  the  6th,  11th,  19th, 
and  27th? 

5.  Which  one  of  the  bills  owed  to  Mr.  Walton  became  due  first? 

6.  If  Mr.  Rogers  had  paid  each  bill  as  it  fell  due,  how  much  cash  would 
have  been  required  to  pay  those  that  matured  during  January? 

7.  If  all  bills  maturing  during  the  month  were  paid,  how  much  did  he  owe 
at  the  end  of  the  month,  whom  did  he  owe,  and  how  much  to  each? 

Illustration  3 


ANSWERS  TO  ANALYSIS  OF  PURCHASES  BOOK  RECORD 

1 .  $751 .60.    The  amount  is  found  by  taking  the  sum  of  the  items  entered. 

2.  $751.60. 

3.  Jan.  31. 

4.  Jan.  15;  Jan.  24;  Feb.  7;  Feb.  25. 

5.  The  bill  of  Jan.  9,  due  Jan.  24. 

6.  $  96.50 

101.20 
221.80 
$419.50    Total  cash  required. 

7.  Mason  &  Weller  $182.40 
R.  C.  Jones  &  Co.  149.70 

$332.10  Amount  owed  at  the  end  of  the  month. 


4  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

EXERCISE    1 

W.  H.  Clark  conducts  a  butter  and  egg  business.  He  buys  from  farmers 
and  poult rym en  and  sells  to  grocers  and  other  retailers.  He  received  bills  during 
the  month  of  August  for  the  following  purchases: 

Aug.    1  John  Holmes,  Woodlawn,  Md.,  July  30,  15  days,  $175.00. 

5  W.  J.  Dixon,  Catonsville,  Md.,  Aug.  4,  20  days,  $155.40. 

14  John  Holmes,  Aug.  11,  30  days,  $211.50. 

17  L.  N.  Wilson  &  Sons,  Catonsville,  Md.,  Aug.  16,  10  days,  $98.70. 

21  W.  J.  Dixon,  Aug.  20,  15  days,  $74.85. 

24  John  Holmes,  Aug.  24,  30  days,  $122.80. 

27  Walter  Crampton,  Ellicott  City,  Md.,  Aug.  27,  10  days,  $74.20. 

With  the  purchases  book  shown  in  illustration  2  as  a  guide,  write  the  entries 
for  the  above  transactions  on  a  sheet  of  journal  paper.  Rule  the  two  additional 
perpendicular  lines  shown  in  the  illustration.  When  the  seven  items  have  been 
entered,  find  the  total  purchases  and  enter  the  amount  in  the  second  column. 

In  recording  these  transactions  be  careful  to  make  the  writing  neat  and  uni- 
form in  size.  Write  the  figures  plainly  and  distinctly.  Do  not  make  the  capital 
letters  too  high.  They  must  be  written  within  the  ruled  lines  on  the  paper.  When 
completed,  present  to  the  teacher  for  examination  and  criticism. 

ANALYSIS 

On  the  bottom  of  the  page  containing  the  purchases  book,  tabulate  the 
answers  to  the  following  questions: 

1.  What  were  Mr.  Clark's  total  purchases  for  the  month? 

2.  If  on  August  31  he  had  paid  none  of  the  bills  for  goods  purchased  during 
August,  how  much  would  he  have  owed? 

3.  Do  the  total  amount  of  purchases  and  the  amount  he  would  have  owed 
agree? 

4.  What  bills  became  due  and  payable  during  the  month? 

5.  If  Mr.  Clark  paid  these  bills  as  they  became  due,  how  much  did  he  owe 
on  unpaid  bills  on  August  31? 

6.  How  much  did  his  purchases  from  each  person  amount  to  during  the 
month? 

7.  If  he  had  paid  the  bills  as  they  fell  due  during  the  month,  whom  did 
he  owe  on  August  31,  and  how  much  to  each? 

8.  How  much  cash  was  required  to  pay  the  bills  that  matured  during  the 
month? 


INTRODUCTION   TO   BOOKKEEPING  5 

RECORDING  SALES 

7.  After  goods  have  been  purchased  and  placed  in  stock,  they  are  then  ready 
for  sale.  As  they  are  sold  they  are  billed  by  the  seller  to  the  buyer.  The  following 
illustration  shows  a  bill  sent  by  Mr.  Cook  to  Mr.  Hart  for  goods  which  were  sold  to 
him. 

Illustration  4 — Bill 


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35 

00 

— 

— 

8.  Notice  that  this  bill  gives  all  the  details  of  the  sale  and  is  similar  in  gen- 
eral form  to  bills  for  goods  purchased.  A  record  of  each  bill  of  goods  sold  is  made 
in  a  book  kept  for  that  purpose,  called  the  sales  book.  Sales  entries  are  therefore 
another  class  of  entries  in  keeping  books. 

The  illustration  on  the  next  page  shows  Mr.  Cook's  sales  book  containing  en- 
tries for  seven  sales  he  made  during  August,  with  the  total  sales  entered  and  the 
book  ruled  to  show  that  all  the  entries  for  the  month  have  been  made.  The 
first  entry  is  for  the  bill  shown  in  illustration  4. 

9.  The  form  of  the  sales  book  differs  little  from  that  of  the  purchases  book. 
However,  since  bills  for  sales  are  sent  to  the  buyers,  the  items  of  each  sale  are 
included  in  the  sales  book  entry  so  that  they  may  be  referred  to  at  any  time  for 
quantities,  grades,  prices,  and  other  information.  As  already  stated,  this  is  not 
necessary  in  entering  purchase  bills  because  the  bills  received  are  kept  for  such 
information.  Sales  are  entered  under  the  date  they  are  billed,  and  the  due  date  is 
determined  from  the  date  of  the  bill. 


g  accountancy  and  business  management 

Illustration  5 — Sales  Book 


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Analysis   of  Transactions 

The  purpose  in  analyzing  transactions  is  to  develop  a  thorough  under- 
standing of  the  relations  established  between  the  parties  to  them.  Such  an 
understanding  will  greatly  simplify  the  work  later  on  in  the  course. 


INTRODUCTION   TO    BOOKKEEPING  7 

In  each  analysis  the  questions  presented  should  be  considered  from  the  view- 
point of  the  person  whose  books  are  being  kept  and  not  from  the  standpoint  of  the 
other  parties  to  the  transactions. 

ANALYSIS 

1.  What  were  Mr.  Cook's  total  sales  for  the  month,  and  how  is  the  amount 
found? 

2.  If  none  of  these  bills  had  been  paid,  how  much  would  his  customers  have 
owed  him  at  the  end  of  the  month? 

3.  Who  owes  for  these  sales,  Mr.  Cook  or  the  purchasers? 

4.  What  were  the  due  dates  of  the  bills  for  goods  sold? 

5.  What  was  the  sum  of  the  amounts  due  from  Mr.  Cook's  customers  for 
bills  maturing  in  August? 

6.  What  is  the  sum  of  the  amounts  not  due  until  the  following  month? 

7.  If  Mr.  Hart  paid  his  bills  when  they  became  due,  how  much  cash  did 
Mr.  Cook  receive  from  him  during  August? 

8.  If  all  bills  falling  due  in  August  were  paid,  which  customers  continued 
to  owe  Mr.  Cook  on  August  31,  how  much  did  each  owe,  and  what  was 
the  total  owed  to  him  at  the  end  of  the  month? 

9.  Explain  the  difference  between  the  expressions,  "One  who  is  owed" 
and  "One  who  owes." 

EXERCISE    2 

J.  R.  Carter  is  a  wholesale  dealer  in  grain  and  feed.  He  buys  from  farm- 
ers and  sells  to  liverymen,  users  of  horse-drawn  vehicles,  and  others  who  buy 
grain  in  small  quantities.    His  sales  for  the  month  of  April  are  given  below: 

April    3  J.  C.  Warren,  211  Second  St.,  10  days,  50  bu.  Oats  @  90ff. 

5  City  Livery  Co.,  12  Market  Place,  15  days,  100  bu.  Oats  @  90^; 

20  bu.  Corn®  $1.05. 

9  John  H.  Horner  Co.,  472  High  St.,  20  days,  3  tons  Hay  @  $21.50. 

14  J.  C.  Warren,  15  days,  5  tons  Straw  @  $14.25;  10  bu.  Corn  @  $1.10. 

17  John  H.  Horner  Co.,  30  days,  100  bu.  Oats  @  92|<£. 

18  J.  C.  Warren,  30  days,  3  tons  Hay  @  $22.50;  25  bu.  Wheat  @  $1.15. 
23  City  Livery  Co.,  30  days,  6  tons  Straw  @  $14.00;  10  tons  Hay  @ 

$22.00. 
26    Walker  &  Sons,  126  Paca  St.,  30  days,  125  bu.  Oats  @  90f<;  50  bu. 

Corn  @  $1.10;  2  tons  Hay  @  $20.00. 
29    John  H.  Horner  Co.,  15  days,  50  bu.  Oats  @  95^. 


8  ACCOUNTANCY   AND   BUSINESS  MANAGEMENT 

Record  these  sales  in  a  Bales  book,  using  a  sheet  of  journal   paper.     Foot 
and  rule  the  book  in  the  manner  illustrated. 


ANALYSIS 

1 .  What  were  Mr.  Carter's  total  sales  for  the  month? 

2.  If  on  April  30  none  of  the  bills  for  goods  sold  had  been  paid,  how  much 
would  his  customers  have  owed  him  on  that  date? 

3.  Do  the  total  sales  and  the  amount  that  would  be  owed  to  him  agree? 

4.  What  bills  became  due  during  the  month? 

5.  If  each  bill  had  been  paid  when  due,  how  much  would  his  customers 
have  owed  him  on  April  30? 

6.  What  were  his  total  sales  to  each  customer  during  the  month? 

7.  Assuming  that  bills  maturing  during  the  month  were  paid,  how  much  did 
each  customer  owe  him  on  unpaid  bills  on  April  30? 

8.  If  Mr.  Warren  paid  his  bills  as  they  became  due,  how  much  of  his  indebt- 
edness to  Mr.  Carter  did  he  cancel? 

9.  If  all  bills  falling  due  in  April  had  been  paid,  how  much  cash  did  he 
receive  from  his  customers? 

10.  If  the  John  H.  Horner  Co.  had  made  no  payments  during  the  month 
except  S100.00  to  apply  on  their  account,  how  much  of  their  indebtedness 
to  Mr.  Carter  would  have  remained  uncanceled  on  April  30? 

CASH  RECEIPTS  AND  PAYMENTS 

10.  Cash  is  received  and  paid  in  making  settlements  for  goods  bought  and 
sold.  Recording  receipts  and  payments  of  cash  is  therefore  another  important 
part  of  a  bookkeeper's  work.  Cash  receipts  and  payments  are  recorded  in  the 
cash  book. 

Recording   Cash   Receipts 

11.  Cash  receipts  are  entered  on  the  left-hand  side  of  the  cash  book.  Each 
entry  includes  the  amount  (which  should  be  written  first),  the  date,  the  name  of  the 
party  from  whom  the  cash  is  received,  and  a  brief  explanation  of  the  entry.  Illus- 
tration 6  shows  the  entries  for  the  cash  received  'by  A.  S.  Parker  during  the 
month  of  January. 


INTRODUCTION   TO   BOOKKEEPING 


Illustration  6 — Cash  Book — Receipts 


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What  was  the  total  amount  of  Mr.  Parker's  cash  receipts  for  the  month? 

What  was  the  total  amount  of  cash  received  from  Walter  Brown  and 

from  Herrick  &  Co.  during  the  month? 

The  last  receipt  of  cash  from  Martel  &  Son  being  in  full,  what  was  the 

total  amount  of  the  bill  sold  to  them,  if  the  date  of  the  bill  was  Jan.  3? 

How  much  cash  was  received  for  bills  sold  in  December? 

How  much  was  received  for  bills  sold  in  January? 

How  much  of  Mr.  Dixon's  indebtedness  was  canceled  during  the  month? 

If  Mr.  Parker  paid  out  $500.00  of  the  total  amount  of  cash  received, 

what  was  the  balance  of  cash  on  hand  January  31? 

exercise  3 

Rule  the  two  additional  lines  shown  in  illustration  6  on  a  sheet  of  journal 
paper;  then  enter  the  following  items  of  cash  received  by  R.  F.  Emerson  during 
the  month  of  July.  Foot  the  column  in  pencil  and  then  prove  the  addition.  Next 
write  the  total  in  ink  and  rule  the  book  as  shown  in  illustration  6. 


4. 
5. 
6. 

7. 


July    2  F.  B.  Nelson,  bill  June  22,  $95.40. 

6  R.  A.  Fisher  &  Co.,  bill  June  12,  $125.12. 

10  T.  E.  Young,  bill  June  12,  $57.50. 

12  F.  B.  Nelson,  bill  June  11,  $176.19. 

17  Carter  &  Harris,  on  a/c  bill  July  7,  $100.00. 

20  R.  A.  Fisher  &  Co.,  bill  July  3,  $117.20. 

25  T.  E.  Young,  bill  July  9,  $67.28. 

28  G.  E.  Emery,  bill  June  28,  $189.45. 

31  Carter  &  Harris,  in  full  bill  July  7,  $76.20. 


10 


.\rcor\TA\CY    AND    BUSINESS    MANAGEMENT 


ANALYSIS 


4. 
5. 

6. 

7. 

8. 

9. 

10. 


What  were  the  total  receipts  of  cash  for  the  month? 
Whal  were  the  amounts  of  cash  received  from  F.  B.  Nelson,  Fisher  &  Co., 
T.  E.  Young,  Carter  &  Harris,  and  G.  E.  Emery? 

If  F.  B.  Nelson  owed  11.  F.  Emerson  $345.12  on  July  1,  how  much  did 
he  owe  on  July  31? 

If  T.  E.  Young  owed  $124.78  on  July  1,  how  much  did  he  owe  on  July  31? 
How  much  of  the  cash  received  from  Fisher  &  Co.  canceled  their  in- 
debtedness on  June  bills?     On  July  bills? 

If  the  cash  received  from  G.  E.  Emery  on  July  28  was  received  on  the 
day  the  money  was  due,  what  were  the  terms  of  the  bill? 
How  much  did  Carter  &  Harris  owe  on  the  bill  of  July  7  after  their 
payment  of  July  17  was  received? 

How  much  of  the  cash  received  applied  on  June  bills?    On  July  bills? 
What  is  the  difference  in  the  meaning  of  "on  a/c"  and  "in  full  of  a/c"? 
If  Mr.  Emerson  had  paid  out  $425.50  of  the  cash  received  during  the 
month,  what  was  the  balance  left  on  hand  July  31? 


Recording  Cash  Payments 

12.  Cash  payments  are  entered  on  the  right-hand  side  of  the  cash  book.  The 
entries  include  the  amount  (which  should  be  written  first) ,  the  date,  the  name  of  the 
party  to  whom  the  cash  is  paid,  and  a  brief  explanation  of  the  entry.  Illustration  7 
shows  the  cash  payments  made  by  Brown  &  Co.  for  the  month  of  February. 

Illustration  7 — Cash  Book  Payments 


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INTRODUCTION   TO   BOOKKEEPING  11 


ANALYSIS 


1.  What  was  the  total  of  Brown  &  Co.'s  cash  payments  for  the  month? 

2.  What  was  the  total  amount  paid  to  each  party? 

3.  The  last  payment  to  Hill  &  Myers  being  in  full,  what  was  the  amount  of 
the  bill  purchased  from  them? 

4.  How  much  cash  was  paid  for  bills  purchased  in  January? 

5.  How  much  was  paid  for  bills  purchased  in  February? 

6.  How  much  of  Brown  &  Co.'s  indebtedness  to  Mr.  Allen  was  canceled 
during  the  month? 

7.  If  the  cash  receipts  for  the  month  were  $1,892.75,  what  was  the  cash 
balance  on  February  28? 

exercise  4 

The  following  are  the  cash  payments  of  John  C.  Watson  for  the  month  of 
July.  Enter  them  in  a  cash  book  in  the  manner  shown  in  illustration  7,  ruling 
on  a  sheet  of  journal  paper  the  two  additional  lines  required.  Then  foot  and  rule 
the  book. 

July    1  Henry  Miller,  bill  June  5,  $27.80. 

3  A.  M.  Gordon,  bill  June  16,  $36.25. 

7  Barnes  &  Co.,  to  apply  on  June  bills,  $100.00. 

12  Henry  Miller,  bill  June  14,  $52.28. 

16  G.  W.  Richards  &  Co.,  on  a/c  bill  July  1,  $125.00. 

19  Barnes  &  Co.,  in  full  of  a/c,  $89.23. 

25  Blake  Bros.  Co.,  bill  July  7,  $142.82. 

27  A.  M.  Gordon,  bill  June  22,  $59.20. 

28  G.  W.  Richards  &  Co.,  in  full  bill  July  1,  $69.90. 

29  Henry  Miller,  bill  July  12,  $97.50. 

30  L.  O.  Cummins,  bill  June  30,  $105.60. 

analysis 

1 .  What  were  the  total  payments  for  the  month? 

2.  What  were  the  total  payments  to  Henry  Miller,  A.  M.  Gordon,  Barnes 
&  Co.,  G.  W.  Richards  &  Co.,  Blake  Bros.  Co.,  and  L.  O.  Cummins? 

3.  If  Mr.  Watson  owed  A.  M.  Gordon  $95.45  on  July  1,  what  did  he  owe 
on  July  31? 

4.  If  Mr.  Watson  owed  Henry  Miller  $211.85  on  July  1,  how  much  of  this 
indebtedness  remained  uncanceled  on  July  31? 

5.  How  much  did  Mr.  Watson  owe  Barnes  &  Co.  on  July  15?, 


12  ACCOUNTANCY  AND    BUSINESS   MANAGEMENT 

6.  If  L.  0.  Cummins  was  paid  on  the  day  his  bill  became  due,  what  were  the 
terms  of  the  bill? 

7.  How  much  did  Mr.  Watson  owe  G.  W.  Richards  &  Co.  on  the  bill  of 
July  1  on  July  31?    On  July  20? 

8.  How  much  of  the  cash  paid  canceled  June  bills?    July  bills? 

9.  If  Mr.  Watson's  cash  receipts  during  the  month  were  $972.66,  what  was 
the  balance  on  hand  July  31? 

REVIEW  QUESTIONS 

1 .  Who  prepares  bills  for  goods  purchased  and  who  receives  them? 

2.  Who  prepares  bills  for  goods  sold  and  who  receives  them? 

3.  What  does  "terms  30  days"  mean? 

4.  What  is  the  purpose  of  the  purchases  book?     Of  the  sales  book? 

5.  Why  are  the  items  omitted  in  purchases  book  entries? 

6.  Why  are  they  included  in  sales  book  entries? 

7.  From  what  date  is  the  due  date  of  a  bill  of  goods  purchased  determined? 

8.  From  what  date  is  the  due  date  of  a  bill  of  goods  sold  determined? 

9.  What  is  the  purpose  of  the  cash  book? 

10.  Where  are  cash  receipts  entered?    Cash  payments? 

11.  What  data  does  a  cash  book  entry  include? 

12.  What  does  "he  canceled  his  indebtedness  to  me"  mean? 

CLASSIFICATION  OF  TRANSACTIONS 

13.  The  transactions  presented  up  to  this  point  have  been  grouped  in  four 
classes,  namely:  purchases,  sales,  cash  receipts,  and  cash  payments.  These  four 
classes  include  by  far  the  larger  number  of  transactions  met  with  in  lines  of  busi- 
ness in  which  profits  are  derived  from  the  buying  and  selling  of  merchandise. 

14.  Grouping  or  classifying  transactions  is  a  part  of  the  work  of  the  book- 
keeper. The  transactions  which  follow  are  listed  in  the  order  in  which  they 
occurred  without  regard  to  their  classification.  They  are  classified  and  recorded 
properly  in  the  purchases,  sales,  and  cash  books  in  the  model  set  on  pages  14  and 
15.  The  transactions  are  those  of  J.  M.  Fuller  for  the  month  of  January.  He  is 
a  dealer  in  farm  products. 

Transactions — Model  Set 

Jan.    2    Bought  of  Samuel  Howe,  Greenfield,  Pa.,  per  his  bill  of  December  31, 
terms  30  days,  $125.00. 


INTRODUCTION   TO   BOOKKEEPING  13 

3    Sold  to  W.  C.  Archer,  12  Penn  St.,  terms  10  days,  40  brls.  Winter 

Apples  @  $3.40;  total  $136.00. 
5    Bought  of  J.  K.  Todd,  Columbia,  Pa.,  per  his  bill  of  Jan.  4,  terms  30 

days,  $100.00. 
8    Sold  to  Harry  Carter,  219  Central  Ave.,  terms  10  days,  15  brls. 

Winter  Apples  @  $3.45,  $51.75;  40  bu.  Potatoes  @  $1.25,  $50.00; 

total  $101.75. 

10  Received  cash  from  W.  C.  Archer  to  cancel  bill  of  Jan.  3,  $136.00. 

1 1  Sold  to  W.  C.  Archer,  terms  30  days,  10  brls.  Winter  Apples  @  $3.50, 
$35.00;  25  bu.  Potatoes  @  $1.25,  $31.25;  total  $66.25. 

16  Bought  of  Samuel  Howe  per  his  bill  of  Jan.  15,  terms  20  days, 
$156.00. 

17  Received  cash  from  Harry  Carter  in  part  payment  of  bill  sold  him 
Jan.  8,  $75.00. 

21  Sold  Wm.  Martin,  925  Elm  St.,  terms  15  days,  50  bu.  Potatoes  @ 
$1.22£;  total  $61.25. 

22  Sold  to  Harry  Carter,  terms  20  days,  15  bu.  Potatoes  @  $1.30,  $19.50; 
30  brls.  Winter  Apples  @  $3.50,  $105.00;  total  $124.50. 

24    Paid  J.  K.  Todd  to  cancel  bill  of  Jan.  4,  $100.00. 

27  Received  cash  from  Wm.  Martin  in  partial  cancelation  of  his  bill  of 
Jan.  21,  $35.00. 

28  Paid  Samuel  Howe  in  full  to  cancel  bill  of  Dec.  31,  $125.00. 

31     Sold  to  W.  C.  Archer,-  terms  30  days,  all  of  the  stock  remaining  on 
hand,  5  brls.  Winter  Apples  @  $3.40;  total  $17.00. 

FOOTING  AND  RULING  BOOKS  IN  MODEL  SET 

15.  Notice  that  the  purchases  and  sales  books  are  footed  and  ruled  in  the 
same  manner  as  formerly.  In  footing  and  ruling  the  cash  book,  however,  the 
cash  balance,  which  is  found  by  taking  the  difference  between  the  total  receipts  and 
total  payments,  is  entered  on  the  payments  side  and  added  to  the  total  payments, 
as  illustrated  in  the  model  cash  book.  This  is  done  in  order  to  show  that  the 
sum  of  the  payments  and  the  balance  is  equal  to  the  total  receipts.  This  process 
is  called  "balancing"  the  cash  book.  The  footings  showing  this  equality  should 
always  be  entered  on  the  corresponding  line  on  the  two  sides  of  the  book,  even  if 
several  lines  on  one  side  or  the  other  must  be  left  blank  in  order  to  do  so.  The 
balance  is  then  brought  down  to  the  receipts  side  under  the  footing. 


14 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


Illustration  8— Purchases  Book — Model  Set 


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Analysis  of  Model  Set  Entries 
By  following  the  analysis  below,  trace  each  transaction  on  pages  12  and  13  to 
the  corresponding  entry  in  the  books. 

Jan.    2     In  this  transaction  merchandise  is  purchased;  therefore  the  entry  is 
made  in  the  purchases  book,  where  such  transactions  are  recorded. 
3     In  this  transaction  merchandise  is  sold;  therefore  the  entry  is  made 

in  the  sales  book,  where  such  transactions  are  recorded. 
5     Merchandise  is  purchased — purchases  book. 
8    Merchandise  is  sold — sales  book. 

10  In  this  transaction  cash  is  received ;  therefore  the  entry  is  made  on  the 
receipts  side  of  the  cash  book,  where  such  transactions  are  recorded. 

1 1  Merchandise  is  sold — sales  book. 

16  Merchandise  is  purchased — purchases  book. 

17  Cash  is  received — cash  book,  receipts  side. 

21  Merchandise  is  sold — sales  book* 

22  Merchandise  is  sold — sales  book. 

24     In  this  transaction  cash  is  paid;  therefore  the  entry  is  made  on  the 
payments  side  of  the  cash  book,  where  such  transactions  are  recorded. 

27  Cash  is  received — cash  book,  receipts  side. 

28  Cash  is  paid — cash  book,  payments  side. 
31     Merchandise  is  sold — sales  book. 

Illustration  9— Cash  Book— Receipts— Model  Set 

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INTRODUCTION    TO   BOOKKEEPING 


15 


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ANALYSIS  QUESTIONS  i     -,' 

1.  What  were  Mr.  Fuller's  total  purchases  from  Mr.  Howe  for  the  month? 
What  were  the  total  payments  to  him?  How  much  did  Mr.  Fuller  owe  Mr.  Howe 
on  January  31?  *  ■*   -  ;  >^- 

2.  What  were  Mr.  Fuller's  total  sales  to  Mr.  Archer?  How  much  cash  was 
received  from  him?    How  much  did  Mr.  Archer  owe  Mr.  Fuller  on  January  31? 

3.  Which  bill  was  canceled  by  the  cash  receipt  entered  on  January  17? 

Illustration  10 — Cash  Book — Payments — Model  Set 


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16  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

4.  Which  bill  was  canceled  by  the  payment  entered  on  January  24? 

5.  Who  received  the  money  for  the  cash  payment  entered  on  January  28? 
Who  paid  it? 

6.  Who  received  the  money  for  the  cash  receipt  entered  on  January  27? 
Who  paid  it? 

SET  1 

COUNTRY  PRODUCE  AND  PROVISION  BUSINESS 

R.  L.  Clark  began  business  in  Springfield,  Mass.,  on  January  1,  as  a  dealer 
in  country  produce  and  provisions.  He  entered  into  a  contract  with  John 
Reed,  a  farmer  of  Fairview,  Mass.,  to  supply  him  with  fruits  and  vegetables  for 
which  Mr.  Clark  is  to  pay  as  soon  as  he  receives  returns  from  sales  of  these 
goods.  Although  he  has  no  ready  money  to  invest  in  his  business,  he  hopes  soon  to 
accumulate  out  of  his  profits  a  sufficient  cash  capital  with  which  to  finance  it. 

WThile  Mr.  Clark  is  beginning  business  without  any  capital,  such  as  money, 
property,  etc.,  which  is  the  accumulated  profits  of  previous  industry,  he  has  the 
advantage  of  a  good  credit.  Credit  consists  of  a  good  name — a  reputation  for 
honesty,  ability,  and  trustworthiness.  A  good  credit  is  essential  in  successfully 
operating  most  business  enterprises  because  a  large  part  of  the  world's  commerce 
is  conducted  on  a  credit  basis.  In  this  instance,  Mr.  Clark's  good  reputation 
enables  him  to  start  in  business  for  himself.  If  he  is  successful  in  his  venture  and 
through  his  industry  earns  profits  and  saves  them,  he  will  thus  accumulate  capital, 
or  wealth. 

The  following  is  a  memorandum  of  the  business  Mr.  Clark  transacted  in 
January.  Record  these  transactions  properly  in  a  set  of  books.  Using  a  double 
sheet  of  journal  paper,  open  the  purchases  book  on  the  front  outside  page  (page  1), 
the  cash  book  on  the  two  inside  pages  (pages  2  and  3),  and  the  sales  book  on  the 
back  outside  page  (page  4).  Rule  the  additional  perpendicular  lines  required  as 
instructed  in  previous  exercises. 

TRANSACTIONS— SET  1 

Jan.    2     Bought  first  bill  of  fruits  and  vegetables  from  John  Reed,  Fairview, 
Mass.,  dated  Dec.  30,  terms  30  days,  $180.00. 
3    Sold  W.  B.  Morgan,  240  Second  Ave.,  terms  10  days,  25  brls.  Baldwin 

Apples  @  $3.30. 
5    Bought  of  John  Reed,  bill  of  Jan.  4,  terms  30  days,  $95.00. 
8    Sold  Heald  &  Co.,  9  Exchange  Way,  terms  10  days,  50  bu.  Potatoes 

@  $1.20;  30  brls.  Baldwin  Apples  @  $3.50. 
13    Received  cash  from  W.  B.  Morgan  to  cancel  bill  of  Jan:  3,  $82.50. 


INTRODUCTION   TO   BOOKKEEPING  17 

14    Sold  W.  B.  Morgan,  terms  20  days,  10  brls.  Baldwin  Apples  @  $3.35  ; 

20  bu.  potatoes  at  95^. 
17    Bought  of  John  Reed,  bill  of  Jan.  16,  terms  30  days,  $167.50. 
17    Received  cash  from  Heald  &  Co.  to  cancel  bill  of  Jan.  8,  $165.00. 
20    Sold  Walter  Williams,  316  Washington  St.,  terms  10  days,  45  brls. 

Baldwin  Apples  @  $3.30;  60  bu.  Potatoes  @  97^. 
23    Bought  of  J.  H.  Cooper,  Merrick,  Mass.,  bill  of  January  16,  terms  10 

days,  $27.00. 

25  Received  cash  from  Walter  Williams  to  cancel  bill  of  January  20, 
$206.70. 

26  Paid  cash  to  J.  H.  Cooper  to  cancel  bill  of  Jan.  21,  $27.00. 
30    Paid  John  Reed  cash  to  cancel  bill  of  Dec.  30,  $180.00. 

30  Sold  remainder  of  goods  on  hand  to  Walter  Williams,  terms  30  days, 
50  bu.  Potatoes  @  95^;  15  brls.  Baldwin  Apples  @  $2.42. 

31  Paid  cash  to  John  Reed  to  cancel  bill  of  Jan.  4,  $95.00. 

FOOTING  AND  RULING  BOOKS 

Foot  and  rule  the  purchases  and  sales  books  as  instructed  previously.  In 
the  cash  book  enter  the  total  receipts  and  total  payments  in  the  right  hand  money 
columns  as  formerly.  Subtract  the  payments  from  the  receipts  to  find  the 
"balance"  of  cash  on  hand,  enter  it  on  the  payments  side,  write  the  footings,  rule  the 
book,  and  bring  down  the  balance  in  the  manner  shown  in  the  cash  book  of  the 
model  set. 

ANALYSIS    OF    SET    1 

1.  What  were  the  total  purchases  from  John  Reed  during  the  month?  What 
were  the  total  payments  to  him?    How  much  did  Mr.  Clark  owe  him  on  Jan.  31? 

2  What  were  the  total  purchases  from  Mr.  Cooper?  What  were  the  total 
payments  to  him?    How  much  did  Mr.  Clark  owe  him  on  January  31? 

3.  What  were  the  total  sales  to  Mr.  Morgan?  What  were  the  total  receipts 
of  cash  from  him?    How  much  did  he  owe  Mr.  Clark  on  January  31? 

4.  What  were  the  total  sales  to  Heald  &  Co?  What  were  the  cash  receipts 
from  them?    How  much  did  they  owe  Mr.  Clark  on  January  31? 

5.  What  were  the  total  sales  to  Walter  Williams?  What  were  the  cash 
receipts  from  him?    How  much  did  he  owe  Mr.  Clark  on  January  31? 

6.  What  bill  was  canceled  by  the  cash  payment  entered  on  January  30? 

7.  What  bill  was  canceled  by  the  cash  receipt  entered  on  January  25? 

8.  For  what  amount  did  Mr.  Clark  become  indebted  to  Mr.  Reed  and  how 
much  of  this  indebtedness  did  he  cancel  during  the  month? 

Note:  The  teacher  should  retain  all  papers  handed  in  by  students  for  this  and  succeeding  sets  because  they  must 
be  returned  t<>  the  pupijs  later  on  when  additional  work  on  the  sets  is  called  for. 


18  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

GROUPING  TRANSACTIONS  WITH  PERSONS 

16.  In  making  the  analysis  of  the  transactions  for  the  model  set  and  set  1, 
called  for  on  pages  14  and  17,  it  was  necessary  to  refer  to  the  purchases,  sales,  and 
cash  books  for  the  different  items  of  merchandise  bought  and  sold  and  of  cash 
received  and  paid,  and  to  make  separate  calculations  to  determine  the  final  result 
of  the  transactions  with  each  party.  This  work  would  have  been  greatly  simpli- 
fied if  a  separate  record  grouping  all  of  the  transactions  with  each  party  had  been 
kept.  Such  a  record  is  provided  in  bookkeeping  by  keeping  an  account  with  each 
party  with  whom  business  is  transacted  in  a  book  called  the  ledger.  Accounts 
show  similar  items  arranged  in  the  most  convenient  form  for  arithmetical  solution 
and  analysis,    The  ledger  is  the  book  of  accounts. 

PERSONAL    ACCOUNTS 

17.  Personal  accounts  are  records  kept  in  the  ledger  with  parties  with  whom 
business  is  transacted.  The  object  in  keeping  personal  accounts  is  to  ascer- 
tain the  amounts  others  owe  to  us  on  account,  and  the  amounts  we  owe  to  others 
on  account  at  any  given  time.  All  accounts  with  individuals,  firms,  or  corporations 
showing  amounts  owed  to  or  by  them  are  classed  as  personal  accounts  for  book- 
keeping purposes. 

18.  Personal  accounts  are  divided  into  two  classes:  (a)  those  showing  what 
others  owe  to  us,  which-  are  known  as  accounts  receivable;  and  (b)  those  showing 
what  we  owe  to  others,  which  are  known  as  accounts  payable. 

POSTING 

19.  Any  book  which  receives  the  first  entry  of  a  transaction,  such  as  the 
purchases,  sales,  and  cash  books,  is  a  book  of  original  entry.  The  entries  in  books  of 
original  entry  are  transferred  to  the  accounts  in  the  ledger  by  a  process  called 
posting,    The  ledger  is  the  book  of  final  entry. 

Posting  from  the  Purchases  and  Sales  Books 

20.  Illustration  12  shows  the  postings  to  the  personal  accounts  in  the  ledger 
of  the  entries  contained  in  the  purchases  book  (illustration  8)  and  sales  book  (illus- 
tration 11)  of  the  model  set  on  pages  14  and  15.  Notice  that  all  entries  in  the 
purchases  book  are  posted  to  the  right-hand  side  of  the  ledger  accounts  of  the 
persons  from  whom  goods  were  purchased,  and  that  all  entries  in  the  sales  book  are 
posted  to  the  left-hand  side  of  the  accounts  of  the  persons  to  whom  goods  were  sold. 


introduction  to  bookkeeping 
Illustration  12 — Ledger — Model  Set 


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21.  As  each  entry  is  posted  the  initial  and  page  number  of  the  book  of 
original  entry  are  entered  in  the  ledger  account  as  shown  above.  The  page 
number  of  the  ledger  account  to  which  the  item  is  posted  is  entered  in  the  page 
column  of  the  book  of  original  entry.     See  illustrations  8  and  11. 


Analysis  of  Postings  from  Purchases  and  Sales  Books 

1.  From  what  book  is  the  credit  of  $125.00  to  Mr.  Howe's  account  posted? 

2.  What  book  contains  the  original  entry  for  the  posting  to  Mr.  Howe's 
account  dated  January  16? 

3.  Where  is  the  purchase  item  of  January  5  posted? 

4.  From  what  book  are  the  debit  items  to  Mr.  Archer's  account  posted? 

5.  What  book  contains  the  original  entries  for  the  items  posted  to  the  debit 
side  of  Mr.  Carter's  account? 

0.    From  what  book  is  the  posting  to  Mr.  Martin's  account  dated  January  21 

made? 
7.    What  do  "S  4"  and  "P  1"  in  the  above  accounts  mean? 


20  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

DEBITING  AND  CREDITING  PERSONAL  ACCOUNTS 
FROM  THE  PURCHASES  AND  SALES  BOOKS 

22.  Parties  from  whom  goods  are  purchased  on  account  are  creditors  of  the 
buyer  because  he  owes  them  until  the  goods  are  paid  for.  The  buyer  therefore 
credits  the  parties  from  whom  he  buys  on  account,  and  the  entries  for  such  transac- 
tions in  the  accounts  which  he  keeps  with  his  creditors  are  credit  entries.  These 
credits  record  the  buyer's  indebtedness  to  his  creditors.  It  is  the  universal  custom 
to  record  credits  on  the  right-hand  side  of  ledger  accounts. 

23.  Parties  to  whom  goods  are  sold  on  account  are  debtors  of  the  seller  because 
they  owe  him  until  the  goods  are  paid  for.  The  seller  therefore  debits  the  parties 
to  whom  he  sells  on  account,  and  the  entries  for  such  transactions  in  the  accounts 
which  he  keeps  with  his  debtors  are  debit  entries.  These  debits  record  the  debtor's 
indebtedness  to  the  seller.  It  is  the  universal  custom  to  record  debits  on  the 
left-hand  side  of  ledger  accounts. 

Posting  from  the  Cash  Book 

24.  The  model  ledger  on  the  next  page  shows  the  postings  of  the  entries 
from  the  cash  book  in  the  model  set  (illustrations  9  and  10)  in  addition  to  the 
postings  from  the  purchases  and  sales  books  shown  in  illustration  12.  Note  that 
all  entries  on  the  receipts  side  of  the  cash  book  are  posted  to  the  right-hand  side 
of  the  accounts  in  the  ledger  of  the  persons  from  whom  the  cash  was  received,  and 
that  all  entries  on  the  payments  side  are  posted  to  the  left-hand  side  of  the 
accounts  of  the  persons  to  whom  payments  were  made. 

Analysis  of  Postings  from  Cash  Book 

1.  Where  is  the  original  entry  for  the  debit  of  $125.00  to  Samuel  Howe's 
account? 

2.  Where  is  the  original  entry  for  the  credit  of  January  9  in  Mr.  Archer's 
account? 

3.  To  what  account  and  which  side  is  the  cash  payment  of  January  24  posted? 

4.  To  what  account  and  which  side  is  the  cash  receipt  of  January  17  posted? 

5.  Where  is  the  original  entry  for  the  credit  of  $35.00  to  William  Martin's 
account? 

DEBITING  AND  CREDITING  PERSONAL  ACCOUNTS  FROM  THE  CASH  BOOK 

25.  When  cash  is  received  from  a  debtor  in  full  for  a  sum  owed  by  him,  the 
payment  cancels  the  indebtedness,  the  party  who  makes  payment  ceases  to  be 
a  debtor,  and  the  parties  stand  in  the  same  financial  relation  to  each  other  as  they 


introduction  to  bookkeeping 
Illustration  13 — Ledger — Model  Set 


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did  before  they  transacted  business.  The  amount  of  the  payment  is  entered  in 
the  cash  receipts  book  and  is  posted  to  the  debtor's  account  in  the  ledger  on  the 
side  opposite  the  debit  entry  to  show  that  the  indebtedness  has  been  canceled  and 
that  the  item  has  been  closed  out  of  the  account. 

26.  When  cash  is  paid  to  a  creditor  in  full  for  a  sum  owed  to  him,  the  pay- 
ment cancels  the  indebtedness,  the  party  who  receives  payment  ceases  to  be  a 
creditor,  and  both  parties  stand  in  the  same  financial  relation  to  each  other  as 
they  did  before  they  transacted  business.  The  amount  of  the  payment  is  entered 
in  tha  cash  payments  book  and  posted  to  the  creditor's  account  in  the  ledger 
on  the  side  opposite  the  credit  entry  to  show  that  the  indebtedness  has  been  can- 
cel! ■  1  and  that  the  item  has  been  closed  out  of  the  account. 

27.  If  a  partial  payment  of  an  amount  previously  debited  or  credited  to  a 
nil  a  count  is  made,  such  payment  partially  cancels  the  original  debt,  and  the 

(li'Tcronoe  between  the  two  amounts  shows  the  balance  still  due  on  the  original 
•  li'bt.     This  is  illustrated  in  the  account  of  William  Martin. 


22  accountancy  and  business  management 

Ruling  Out  Canceling  Items  in  Personal  Accounts 

28.  Notice  how  the  canceling  items  in  the  accounts  in  illustration  13  are 
ruled  out.  Such  items  could  be  canceled  by  erasing  the  original  debit  or  credit, 
writing  "Paid"  alongside  of  it,  or  ruling  aline  through  it.  The  first  method 
would  destroy  the  record  entirely,  and  the  second  and  third  methods  would  invite 
errors  and  confusion  because  one  debit  or  credit  might  be  canceled  by  two  or  more 
items.  The  method  of  entering  canceling  items  on  the  opposite  side  of  an  account 
and  ruling  them  out  has  therefore  been  adopted  to  provide  a  convenient  and 
permanent  record. 

Balancing  Personal  Accounts 

29.  The  balance  of  an  account  is  found  by  taking  the  difference  between  the 
sum  of  the  debits  and  the  sum  of  the  credits.  When  there  are  two  or  more  unpaid 
items  on  either  side  of  an  account,  as  in  Mr.  Archer's  account,  the  items  are  added 
and  the  total  is  written  in  small  pencil  figures  directly  underneath  the  last  item. 
The  balance  is  entered  in  the  explanation  column  of  the  larger  side  on  the  line  on 
which  the  last  entry  is  made.  If  the  debit  side  is  the  larger,  the  party  owes  the 
proprietor  the  amount  of  the  balance.  If  the  credit  side  is  the  larger,  the  pro- 
prietor owes  the  party  the  amount  of  the  balance. 

SET  1— CONTINUED 

On  a  single  sheet  of  ledger  paper  open  the  personal  accounts  required  for 
set  1,  allowing  six  lines  for  each  account,  and  post  the  entries  from  the  purchases, 
sales,  and  cash  books  in  the  order  named. 

Procedure  in  Posting 
The  following  procedure  should  invariably  be  followed  in  posting: 

1.  Post  the  amount  first. 

2.  Next  post  the  date,  and  explanation  if  any.     Make  it  a  rule  upon  opening 
an  account  to  write  immediately  the  year  date  in  the  date  columns. 

3.  Enter  in  the  ledger  account  the  initial  and  page  number  of  the  book  of 
original  entry  from  which  the  item  is  posted. 

4.  Write  in  the  folio  column  of  the  book  of  original  entry  the  ledger  page 
number  of  the  account  to  which  the  item  is  posted. 

5.  Rule  out  canceling  items  as  they  are  posted. 

When  the  posting  is  completed,  present  the  books  of  original  entry  and  the 
ledger  to  the  teacher  for  approval.     This  completes  the  work  of  set  1. 


INTRODUCTION   TO   BOOKKEEPING  23 

SET  2 
GRAIN  AND  FEED  BUSINESS 

Adam  Richards,  of  Marshalltown,  Iowa,  has  made  an  arrangement  with  his 
friends  among  the  farmers  in  his  community  to  cooperate  with  them  in  securing 
satisfactory  prices  for  their  crops.  As  he  does  not  have  any  capital,  they  agreed 
to  send  him  their  grain,  fruits,  and  vegetables  on  open  account  at  prices  sufficient 
to  cover  the  cost  of  production  and  a  fa  ir  profit.  Mr.  Richards  on  his  part  agreed  to 
devote  all  of  his  time  to  finding  a  market  for  the  crops  at  prices  which  will  enable 
him  to  make  a  profit  over  and  above  the  cost  to  him  and  the  value  of  his  time  and 
labor.  He  has  further  agreed  to  pay  the  farmers  as  soon  as  he  receives  returns 
from  the  products  sold. 

His  transactions  for  the  month  are  given  below.  Record  them  in  the  proper 
books,  using  a  double  sheet  of  journal  paper  as  in  set  1.  After  all  entries  are  made, 
total  and  rule  the  books  of  original  entry.  Then  post  the  items  from  the  books  of 
original  entry  to  the  ledger  in  the  following  order — purchases  book,  sales  book,  and 
cash  book.  Use  a  single  sheet  of  ledger  paper,  allowing  six  lines  for  each  account. 
Rule  out  balancing  items  as  they  are  posted ;  then  enter  the  balances  of  the  open 
accounts  in  pencil  figures  on  the  proper  side.  When  completed,  present  the  work 
to  the  teacher  for  approval. 

Transactions — Set  2 
Oct.     1     Received  shipment  of  wheat,  corn,  and  oats  from  J.  H.  Burch, 
^Albion,  Iowa,  per  his  bill  of  Sept.  28,  on  account,  $232.50.       • 

2  Sold  Frank  J.  Darling,  12  Main  St.,  on  account  ten  days,  25  bu. 
wheat  @  $1.60;  50  bu.  oats  @  75  j5. 

3  Sold  Muscatine  Flour  Mills,  Muscatine,  Iowa,  on  account  15  days, 
125  bu.  wheat  @  $1.58;  20  bu.  corn  @  $1.25. 

6    Received  shipment  from  John  Roberts,  Marietta,  Iowa,  per  his  bill 
of  Oct.  5,  on  account,  $249.00. 

10  Sold  Henry  Miller,  Melbourne,  Iowa,  on  account  15  days,  5  tons 
baled  hay  @  $21.50;  50  bu.  rye  @  $1.85;  40  bu.  corn  @  $1.27£. 

11  Received  from  Frank  J.  Darling  cash  for  bill  of  Oct.  2,  $77.50. 

17  Received  cash  from  Muscatine  Flour  Mills  in  full  of  account,  $222.50. 

18  Paid  J.  II.  Burch  on  account,  $100.00. 

20    Sold  Frank  J.  Darling,  on  account  15  days,  50  bu.  oats  @  77^f; 
3  tons  baled  hay  @  $21.50. 


24  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

21  Bought  from  Evan  Douglas,  Three  Hills,  Iowa,  per  his  bill  of  Oct.  9, 
on  account,  $47.50. 

22  Received  cash  from  Henry  Miller  to  apply  on  bill  of  October  10, 
S200.00. 

23  Sold  Henry  Miller,  terms  15  days,  30  bu.  wheat  @  $1.61;  15  bu. 
corn  @  $1.25. 

25  Paid  John  Roberts  on  account,  $150.00. 

26  Sold  Muscatine  Flour  Mills,  on  account  30  days,  50  bu.  corn  @  $1.20. 

27  Paid  J.  H.  Burch  on  account,  $75.00. 

28  Received  cash  from  Henry  Miller  on  account,  $100.00. 

29  Paid  Evan  Douglas  in  full  for  bill  of  October  19,  $47.50. 
31  Paid  John  Roberts  on  account,  $50.00. 

IMPERSONAL  ACCOUNTS 

30.  So  far  the  only  ledger  accounts  considered  have  been  accounts  with 
persons;  that  is,  personal  accounts.  In  modern  bookkeeping,  records  of  the  cost  of 
merchandise  purchased,  the  income  from  merchandise  sold,  the  receipts  of  cash, 
the  payments  of  cash,  and  of  the  expenses  of  doing  business  are  also  kept  in  the 
ledger.  These  records  are  kept  in  the  purchases,  sales,  cash,  and  expense  accounts. 
Such  accounts  are  impersonal  accounts.  Taken  together,  they  show  on  one  side 
the  costs  and  receipts,  and  on  the  other  the  incomes  and  expenditures  resulting 
from  conducting  a  business.  It  is  from  their  results  that  the  final  profit  or  loss  is 
determined.  Illustration  14  shows,  in  addition  to  the  personal  accounts  pre- 
viously illustrated,  the  impersonal  accounts  required  in  the  ledger^For  the  model 
set  on  pages  14  and  15. 

31.  The  item  on  the  debit  side  of  the  purchases  account  is  the  posting  of  the 
total  purchases  from  the  purchases  book.  The  item  on  the  credit  side  of  the  sales 
account  is  the  posting  of  the  total  sales  from  the  sales  book.  The  debit  item  in  the 
cash  account  is  the  posting  of  the  total  receipts  from  the  cash  book,  and  the  credit 
item  is  the  posting  of  the  total  payments.  As  no  expenses  are  recorded  in  the 
model  set,  no  expense  account  is  required  in  the  ledger. 

DEBITING  AND  CREDITING  IMPERSONAL  ACCOUNTS 

32.  Purchases  are  invariably  debited  to  purchases  account.  Sales  are 
always  credited  to  sales  account.  The  merchandise  for  which  these  accounts  are 
debited  and  credited  respectively  consists  exclusively  of  the  commodities  dealt  in. 
Merchandise  is  the  name  given  to  commodities  which  are  purchased  for  the  pur- 
pose of  selling  them  at  a  profit. 


introduction  to  bookkeeping 
Illustration  14 — Ledger — Model  Set 


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33.  The  total  receipts  of  cash  are  invariably  debited  to  cash  account,  and  the 
total  payments  are  always  credited  to  that  account. 

34.  We  have  learned  that  we  debit  persons  when  they  owe  us,  and  we  credit 
them  when  we  owe  them.  It  should  be  clearly  understood  that  the  terms  debit 
and  credit  are  used  in  connection  with  impersonal  accounts  only  as  convenient 
terms  to  indicate  which  side  of  such  accounts  is  referred  to.  Only  persons  can 
owe  or  be  owed.  The  purchases  and  sales  accounts  represent  inanimate  things 
which  have  no  power  to  owe  or  be  owed,  and  therefore  cannot  be  debited  or  credited 
for  the  reasons  that  personal  accounts  are  debited  and  credited.     The  same  is  true 


26 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


of  the  cash  and  expense  accounts.  The  student  should  understand  at  once  that 
receipts,  costs,  and  expenses  are  merely  listed  on  the  debit  side  of  impersonal 
accounts,  and  that  expenditures,  returns,  and  incomes  are  listed  on  the  credit  side. 

SET  2— CONTINUED 

Open  the  purchases,  sales,  and  cash  accounts  in  the  ledger  for  set  2  and  post 
to  them  the  totals  of  the  purchases,  sales,  and  cash  books.  As  the  totals  are 
posted,  enter  in  the  folio  column  of  the  ledger  the  page  number  of  the  book  of 
original  entry  from  which  the  items  were  posted.  Then  enter  in  the  book  of 
original  entry  the  page  number  of  the  ledger  to  which  the  postings  were  made. 
When  completed,  present  the  books  of  original  entry  and  the  ledger  to  the  teacher 
for  approval. 


.  EQUALITY  OF  DEBITS  AND  CREDITS 

35.  Refer  to  the  purchases  book  (illustration  8)  and  the  ledger  (illustration  14) 
of  the  model  set,  and  notice  that  the  sum  of  the  three  items  posted  to  the  credit 
of  personal  accounts  from  the  purchases  book  is  equal  to  the  debit  to  the  pur- 
chases account  for  the  posting  of  the  total  purchases.  The  entries  in  the 
purchases  book,  as  posted  to  the  ledger,  expressed  in  itemized  ledger  form  are 
therefore  equivalent  to  the  third  illustration  below: 

Purchases  Book 

Samuel  Howe  125.00 
J.  K.  Todd  100.00 
Samuel  Howe  156.00 


Total  Purchases 


381.00 


Ledger  as  posted 

Which  is  e< 

luivalent  to 

Samuel  Howe 

Samuel  Howe 

125.00 

125.00 

156.00 

156.00 

J.  K.  Todd 

J.  K.  Todd 

100.00 

100.00 

Purchases 

Purchases 

381.00 

125.00 
100.00 
156.00 

Total 

Total 

Total 

Total 

debits 

credits 

debits 

credits 

381.00 

381.00 

381.00 

381.00 

INTRODUCTION   TO   BOOKKEEPING 


27 


36.  Posting  the  total  of  the  purchases  book  to  the  purchases  account,  instead 
of  posting  each  item  separately,  saved  two  postings.  If  there  had  been  one  hundred 
purchases  during  the  month  instead  of  three,  ninety-nine  postings  would  have 
been  saved. 

37.  In  like  manner,  the  sum  of  the  six  debits  to  persons  posted  from  the 
sales  book  is  equal  to  or  balanced  by  the  total  sales  posted  to  the  sales  account,  and 
five  postings  are  saved  by  posting  the  total  instead  of  posting  each  item.    Thus : 


Sales  Book 
W.  C.  Archer  136.00 
Harry  Carter  101.75 
W.  C.  Archer  66.25 
William  Martin  61.25 
Harry  Carter  124.50 
W.  C.  Archer        17.00 

Total  Sales 


Ledger  as  posted 
W.  C.  Archer 


Which  is  equivalent  to 
W.  C.  Archer 


506.75 


136.00 

136.00 

66.25 

66.25 

17.00 

17.00 

Harry  Carter 

Harry  Carter 

101.75 

101.75 

124.50 

124.50 

William  Martin 

William  Martin 

61.25 

61.25 

Sales 

Sales 

Total 
debits 
506.75 


506.75 


Total 

credits 
506.75 


Total 
debits 
506.75 


136.00 
101.75 

66.25 

61.25 
124.50 

17.00 
Total 

credits 
506.75 


38.  Similarly,  the  three  credits  to  personal  accounts  posted  from  the  cash 
receipts  book  are  balanced  by  the  total  receipts  posted  to  the  debit  of  cash  account, 
and  the  two  debits  to  personal  accounts  posted  from  the  cash  payments  book  are 
balanced  by  the  total  payments  posted  to  the  credit  of  that  account.  If  each  item 
of  cash  received  and  paid  had  been  posted  separately  to  the  cash  account,  five 
postings  would  have  been  required  instead  of  two  postings  for  the  totals,  or  three 
additional  postings  as  illustrated  on  the  next  page ; 


28 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


Cash  Receipts 

W.  C.  Archer  136.00 
Harry  Carter  101.75 
William  Martin    35.00 

Total  Receipts 

Cash  Payments 
J.  K.  Todd  100.00 

Samuel  Howe     125.00 

Total  Payments 


Ledger  as  posted 
Samuel  Howe 


125.00  | 

J.  K.  Todd 

272.75 

100.00  | 

W.  C.  Archer 

|  136.00 

Harry  Carter 

225.00 

|  101.75 

William  Martin 

Which  is  equivalent  to 
Samuel  Howe 

125.00  | 

J.  K.  Todd 

100.00  | 

W.  C.  Archer 

|  136.00 

Harry  Carter 

|  101.75 
William  Martin 


35.00 


35.00 


Cash 


Cash 


272.75 


225.00 


136.00 

100.00 

101.75 

125.00 

35.00 

Total 

Total 

debits 

credits 

497.75 

497.75 

Total  Total 

debits  credits 

497.75     497.75 

39.  One  of  the  objects  therefore  in  classifying  and  recording  transactions 
in  the  purchases,  sales,  and  cash  books  is  to  reduce  posting  to  the  minimum,  since 
the  totals  instead  of  the  individual  items  can  be  posted  to  the  purchases,  sales, 
and  cash  accounts. 

40.  If  all  the  debit  and  credit  items  included  in  the  three  center  illustrations 
above  are  brought  together  in  their  respective  accounts,  the  accounts  will  appear  * 
exactly  as  they  are  in  the  model  ledger.    The  three  right-hand  illustrations  show 
a  detailed  analysis  of  the  postings  in  the  model  ledger. 

41.  It  follows  from  the  above  that  when  all  items  and  totals  in  the  books  of 
original  entry  have  been  correctly  posted  to  the  ledger  accounts,  the  total  debits  will 
equal  the  total  credits.  It  is  for  this  reason  that  this  method  of  keeping  books  is 
called  double  entry  bookkeeping;  that  is,  for  each  debit  entry  there  are  one  or  more 
credit  entries  of  equal  amount,  or  vice  versa. 


INTRODUCTION   TO   BOOKKEEPING 


29 


THE  TRIAL  BALANCE 

42.  Since  the  debit  and  credit  items  posted  from  each  book  of  original  entry- 
are  equal,  it  follows  that  after  all  balancing  items  have  been  ruled  out  of  the 
accounts,  the  sum  of  the  debit  balances  must  equal  the  sum  of  the  credit  balances, 
as  shown  by  the  following  list  of  accounts,  with  their  balances,  taken  from  the  model 
ledger  (illustration  14). 

Samuel  Howe  156.00 

W.  C.  Archer  83  25 

Harry  Carter  124 .  50 

William  Martin  26.25 

Purchases  381.00 

Sales  506.75 

Cash  47.75  

662.75  662.75 

43.  A  trial  balance  is  a  list  of  open  accounts  in  the  ledger,  with  the  balance 
of  each  account  set  opposite  its  name,  showing  that  the  sum  of  the  debit  balances 
is  equal  to  the  sum  of  the  credit  balances.  The  above  list  of  balances  is  in  reality 
a  trial  balance.  Accounts  that  are  in  balance  are  not  included  in  the  trial  balance. 
Illustration  15  shows  the  balances  of  the  accounts  in  the  model  ledger  set  up  in 
the  regular  form  of  a  trial  balance.  The  figures  in  the  folio  column  are  the  ledger 
page  numbers  of  the  accounts. 

Illustration  15 — Trial  Balance — Model  Set 


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Results  Shown  by  Trial  Balance 

The  above  trial  balance  shows  the  following  results: 

1.  J.  M.  Fuller,  the  proprietor,  owes  Samuel  Howe  $156.00.     Amounts  owed 
by  us  to  others  are  liabilities. 

2.  Mr.  Archer  owes  Mr.  Fuller  $83.25.     Amounts  owed  to  us  by  others  are 
assets. 


30 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


3.  Mr.  Carter  owes  Mr.  Fuller  $124.50,  which  is  an  asset. 

4.  Mr.  Martin  owes  Mr.  Fuller  $26.25,  which  is  an  asset. 

5.  Mr.  Fuller's  purchases  for  the  month  cost  him  $381.00. 

6.  His  sales  for  the  month  were  $506.75. 

7.  His  cash  balance  is  $47.75,  which  is  an  asset.     Assets  also  include  what  a 
person  owns  or  possesses. 

STATEMENT  OF  INCOME 

44.  Since  all  the  merchandise  Mr.  Fuller  bought  during  the  month  was 
sold,  the  cost  of  purchases  as  shown  by  the  balance  of  the  purchases  account, 
$381.00,  is  therefore  the  cost  of  goods  sold.  Since  the  income  from  goods  sold,  as 
shown  by  the  balance  of  the  sales  account,  is  $506.75,  the  profit  is  the  difference 
between  these  two  amounts,  thus: 


Income  from  Goods  Sold 
Cost  of  Goods  Sold 
Profit 


$506.75 
881.00 
125.75 


This  statement  would  be  set  up  in  bookkeeping  form  as  follows: 
Illustration  16 — Statement  of  Income 


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45.  The  profit  is  designated  as  the  gross  trading  profit  because  it  is  the  profit 
which  results  from  the  buying  and  selling  of  or  trading  in  merchandise.  Gross  trad- 
ing profit  is  defined  as  the  difference  between  the  income  from  sales  and  the  cost  of 
goods  sold.  If  the  cost  of  goods  sold  exceeds  the  income  from  sales,  the  difference 
is  the  gross  trading  loss. 

46.  It  will  now  be  of  interest  to  ascertain  where  this  profit  of  $125.75  is. 
As  Mr.  Fuller  began  business  without  capital  and  now  has  a  cash  balance  of  $47.75, 
which  is  so  much  capital,  that  much  of  his  profit  is  accounted  for  in  his  cash  account, 
leaving  $78.00  still  unaccounted  for.  The  trial  balance  shows  that  three  of  his 
customers  still  owe  him  for  goods  sold,  and  that  he  owes  one  creditor  for  goods 
purchased,  the  amounts  being  as  follows: 


INTRODUCTION   TO    BOOKKEEPING 


31 


Amounts  Owed  to  Mr.  Fuller  (Assets) 
W.C.Archer  $83.25 

Harry  Carter  124.50 

William  Martin  26.25 

Total 

Amount  Owed  by  Mr.  Fuller  (Liabilities) 
Samuel  Howe 

Net  Amount  Owed  to  Mr.  Fuller 


234.00 


156.00 
78.00 


47.  It  will  thus  be  seen  that  the  remainder  of  Mr.  Fuller's  profit  is  repre- 
sented in  the  difference  between  what  others  owe  him  and  what  he  owes  others. 
This  exact  amount  would  have  been  realized  in  cash  if  all  sums  owed  to  him  and  the 
sums  he  owed  to  others  had  been  paid  on  or  before  January  31. 

STATEMENT  OF  ASSETS  AND  LIABILITIES 

48.  When  profits  are  determined,  it  is  also  customary  to  ascertain  one's 
financial  standing  by  preparing  a  statement  of  assets  and  liabilities.  This  statement 
is  prepared  from  the  accounts  in  the  trial  balance  which  show  assets  and  liabilities. 
If  the  cash  balance  were  included,  the  above  tabulation  of  amounts  owed  to  and 
by  Mr.  Fuller  would  be  a  statement  of  his  assets  and  liabilities.  A  complete 
statement,  arranged  in  proper  bookkeeping  form,  appears  below. 

Illustration  17 — Statement  of  Assets  and  Liabilities 


v7 
2i 


7^ 


z<r/ 


AT<g 


7* 


LZSV.J- 


49.  The  difference  between  the  sum  of  the  assets  and  the  sum  of  the  liabilities 
is  the  net  assets.  Capital  consists  of  assets.  The  net  assets  constitute  the  pro- 
prietor's capital  investmentf  or  net  capital.  In  this  instance  the  net  assets  are  repre- 
sented by  and  are  equal  to  the  profit  for  the  month.  It  will  thus  be  seen  that 
capital  is  accumulated  out  of  profits.     Losses,  on  the  other  hand,  decrease  capital. 


32  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

50.  Profits  may  be  withdrawn,  or  they  may  "be  allowed  to  remain  in  a  busi- 
ness as  a  part  of  its  working  capital.  Could  Mr.  Fuller  draw  out  his  entire  profit 
in  cash?  Why  not?  How  much  of  it  could  he  draw  out  in  cash?  Under  what  con- 
ditions could  he  have  withdrawn  his  entire  profit  in  cash? 

51.  If  Mr.  Fuller  were  to  collect  the  debts  due  him  and  pay  his  liabilities, 
and  then  withdraw  his  profit,  his  business  would  be  left  without  any  assets  or 
capital,  which  was  the  condition  at  the  time  he  began  business  on  January  1.  As 
a  working  cash  capital  to  meet  obligations  when  they  fall  due  and  to  pay  current 
expenses  will  now  be  necessary  in  conducting  his  business,  he  has  decided  to  allow 
his  profit  to  remain  in  the  business  for  the  present.  In  other  words  he  has  decided 
to  invest  his  profits  in  his  business.  "the  amount  of  the  profit  therefore  becomes 
his  capital  at  the  beginning  of  the  next  month's  business.  This  capital  will  become 
a  cash  capital  as  soon  as  his  accounts  receivable  are  converted  into  cash,  out  of 
which,  however,  his  liabilities  will  have  to  be  paid.  It  will  thus  be  seen  that 
capital  consists  of  the  profit  from  previous  industry  which  has  been  invested  in 
an  enterprise  to  promote  it  and  produce  additional  profits  in  the  future. 

Gross  Profits  and  Net  Profits 

52.  If  during  the  month  Mr.  Clark  had  paid  various  expenses,  such  as  rent, 
fuel,  and  supplies,  out  of  his  personal  funds  for  which  he  had  turned  in  no  report, 
amounting  to  $47.60,  what  would  have  been  his  net  profit,  and  how  would  it  have 
been  found?  The  answer  would  naturally  be  $73.40,  found  by  taking  the  difference 
between  the  gross  trading  profit  and  the  total  expenses.  It  should  be  observed 
that  there  is  a  distinct  difference  between  gross  profits  and  net  profits.  The 
gross  profits  are  the  difference  between  the  total  sales  and  the  cost  of  goods 
sold,  while  net  profits  are  gross  profits  less  expenses.  There  can  be  no  gross  profit 
unless  the  goods  are  sold  for  more  than  they  cost.  There  can  be  no  net  profit  if 
expenses  are  greater  than  gross  profit.  In  such  an  instance  the  difference  would  be 
a  net  loss. 

SET  2— CONTINUED 

On  a  sheet  of  journal  paper  prepare  a  trial  balance  from  the  ledger  of  set  2 
and  present  it  to  the  teacher  for  approval.  Then  prepare  a  statement  of  income, 
and  a  statement  of  assets  and  liabilities,  and  present  them  for  approval.  This 
completes  the  work  of  set  2. 

review  questions 

1.  What  is  the  object  of  keeping  personal  accounts? 

2.  Define  a  debtor ;  a  creditor. 


INTRODUCTION  TO   BOOKKEEPING  33 

3.  What  are  books  of  original  entry?  Name  those  with  which  you  are 
familiar. 

4.  How  are  debit  and  credit  items  in  the  books  of  original  entry  transferred 
to  the  ledger? 

5.  On  which  side  of  ledger  accounts  are  debit  items  posted?    Credit  items? 

6.  To  which  side  of  the  personal  accounts  are  the  individual  entries  in  the 
purchases  book  always  posted?  Are  the  personal  accounts  debited  or 
credited  from  this  book? 

7.  To  what  account  is  the  total  of  the  purchases  book  always  posted?  Is 
this  total  a  debit  or  a  credit  item? 

8.  To  which  side  of  the  personal  accounts  are  the  individual  entries  in  the 
sales  book  always  posted?     Are  these  accounts  debited  or  credited? 

9.  To  what  account  is  the  total  of  the  sales  book  always  posted?  Is  this 
total  a  debit  or  a  credit  item? 

10.  To  which  side  of  the  personal  accounts  are  the  individual  entries  in  the 
cash  book  always  posted?    Are  these  accounts  debited  or  credited? 

11.  To  what  account  are  the  totals  in  the  cash  book  posted?  Which  total  is 
a  debit  item  and  which  a  credit  item? 

12.  What  result  does  the  purchases  account  show?  Sales  account?  Cash 
account? 

13.  How  is  the  amount  of  profit  determined? 

14.  What  is  an  asset? 

15.  What  is  a  liability? 

THE   JOURNAL 

53.  Three  books  of  original  entry — the  purchases,  sales,  and  cash  books — 
have  been  introduced  up  to  this  point.  In  these  books  purchases,  sales,  and  cash 
transactions  respectively  are  classified  and  recorded.  Another  book  of  original 
entry,  called  the  journal,  is  required  in  which  to  make  entries  for  transactions 
which  cannot  be  classified  in  the  above-named  books.  Examples  of  entries  which 
are  made  in  the  journal  are : 

(1)  Entries  for  unusual  transactions  and  transactions  which  do  not  occur 
with  sufficient  frequency  to  justify  the  keeping  of  a  special  book  in  which 
to  classify  them. 

(2)  Adjusting  entries  for  goods  purchased  or  goods  sold  which  are  returned 
for  credit. 

(3)  Adjusting  entries  for  rebates  and  allowances  on  purchases  and  sales 
resulting  from  errors  in  pricing,  or  from  shortage  and  damage  claims. 

Illustration  18  shows  the  entries  for  C.  D.  Clarkson's  unclassified  transactions 
for  the  month  of  April  requiring  adjustment  entries  in  the  journal. 


34  accountancy  and  business  management 

Illustration  18 — Model  Journal 


c 

x/ 


// 


2J- 


60 


3z 


jr<j 


// 


CO 


54.  A  journal  entry  records  separately  both  the  debit  and  the  credit  items 
arising  out  of  a  transaction,  and  includes  an  explanation  of  the  entry.  The  amounts 
of  debit  items  are  entered  in  the  left-hand  money  column,  and  the  amounts  of 
credit  items  in  the  right-hand  column.  The  names  of  accounts  to  be  debited  are 
placed  just  to  the  right  of  the  second  perpendicular  line  in  the  journal;  that  is,  to 
the  right  of  the  folio  column.  The  names  of  accounts  to  be  credited  are  indented 
slightly  as  shown  in  illustration  18. 

The  journal  entries  in  this  illustration  record  the  following  transactions: 

April    5    F.  G.  Allen  returned  to  Mr.  Clarkson  for  credit  5  brls.  Red  Seal 
Flour,  which  were  billed  to  him  @  $6.50  per  brl.,  the  flour  being 
mustj''  and  therefore  unsalable,  $32.50. 
6    Mr.  Clarkson  returned  the  musty  flour  to  Forbes  &  Co.,  from  whom 
he  purchased  it,  for  credit  at  the  cost  price,  $4.25  per  brl.,  $21.25. 
17    Arthur  Wilkins  claimed  a  shortage  of  ten  gallons  of  vinegar  in  a 
barrel  sold  him  on  April  14.     As  he  was  charged  15f$  per  gallon 
Mr.  Clarkson  allowed  him  credit  for  $1.50. 
21     Mr.  Clarkson  received  a  credit  of  $11.60  from  the  City  Milling  Co., 
being  a  rebate  of  10^  per  barrel  on  116  barrels,  for  selling  over  100 
barrels  of  Snowflake  Flour  during  April. 


ANALYSIS  OF  MODEL  JOURNAL  ENTRIES 


April  5 


By  returning  this  flour  Mr.  Allen  has  decreased,  or  partially  canceled, 
his  indebtedness  to  Mr.  Clarkson  incurred  when  the  flour  was 
sold  to  him.    As  Mr.  Allen's  account  was  debited  at  the  time  the 


INTRODUCTION   TO   BOOKKEEPING  35 

sale  was  made;  his  account  must  now  be  credited  for  the  flour 
returned,  at  the  selling  price.  As  Mr.  Clarkson  credited  his  sales 
account  for  the  amount  of  the  original  sale,  he  must  now  debit  that 
account  for  the  selling  price  of  the  flour  returned  because  his  income 
from  sales  is  decreased  by  that  amount. 

The  original  sale  amounted  to  $100.00.  After  the  required  sales 
book  entry  and  above  journal  entry  were  made  and  posted  to 
Mr.  Allen's  account  and  the  sales  account,  these  accounts  would 
show  a  debit  and  a  credit  balance  respectively  of  $67.50  as  far  as 
these  two  transactions  are  concerned.     Thus; 

F.  G.  Allen  Sales 


100.00  J     32.50  32.50         100.00 

April  6  By  returning  this  flour  to  Forbes  &  Co.  Mr.  Clarkson  has  decreased, 
or  partially  canceled,  his  indebtedness  to  them  incurred  when 
he  bought  the  flour.  As  Mr.  Clarkson  credited  them  at  the 
time  he  made  the  purchase,  he  now  debits  them  for  the  flour  re- 
turned, at  its  cost  price.  As  he  debited  his  purchases  account 
when  he  bought  it,  he  now  credits  that  account  because  his  cost  of 
purchases  is  decreased  by  that  amount. 

17  The  shortage  in  the  sale  decreases  or  partially  cancels  Mr.  Wilkins' 
indebtedness  to  Mr.  Clarkson,  and  therefore  his  account  is  credited. 
Mr.  Clarkson's  income  from  sales  is  decreased,  and  therefore  he 
debits  the  sales  account. 

21  The  rebate  partially  cancels  Mr.  Clarkson's  indebtedness  to  the 
City  Milling  Co.,  and  therefore  he  debits  them.  The  rebate 
decreases  the  cost  of  his  purchases,  and  therefore  purchases  account 
is  credited. 

55.  Each  debit  and  credit  item  is  posted  separately  from  the  journal  to  the 
proper  account  in  the  ledger.  It  is  not  possible  to  post  totals  in  a  two  column 
journal  because  the  items  entered  in  this  book  are  miscellaneous  items  affecting 
various  accounts;  that  is,  they  are  not  all  of  one  class  such  as  the  transactions 
grouped  in  the  purchases,  sales,  and  cash  books. 

exercise  5 
Make  journal  entries  for  the  following  transactions  of  C.  B.  Aiken: 

Aug.    4    He  allowed  J.  M.  Rose  credit  for  a  shortage  of  25  lbs.  Creamery 
Butter  @  30jf,  included  in  a  sale  to  him  on  July  29,  $7.50. 
11     Clarke  &  Co.  overcharged  him  15^  per  brl.  on  25  brls.  Winter  Flour 


36  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

he  purchased  from  them  July  28.  He  called  their  attention  to  it  and 
has  received  a  credit  of  $3.75. 

15  Melton  &  Dane  returned  for  credit  10  doz.  Canned  Corn  @  $1.65  per 
doz.,  which  they  ordered  by  mistake.  Mr.  Aiken  has  given  them 
credit  for  $16.50. 

18  H.  A.  Rollins  reports  an  overcharge  of  250  per  brl.  on  20  brls.  Har- 
vest Apples  sold  him  on  August  15.  Mr.  Aiken  allowed  him  credit 
for  $5.00. 

27  H.  B.  Knight  returned  one  tub  of  rancid  butter,  which  was  unsalable. 
Mr.  Aiken  gave  him  credit  for  50  lbs.  @  370,  $18.50. 

28  Mr.  Aiken  returned  the  rancid  butter  to  Fitch  &  Sons,  from  whom  he 
purchased  it,  and  received  credit  at  the  cost  price,  270  per  lb.,  $13.50. 

Comparison  of  Classified  Entries  and  Journal  Entries 

56.  Journalizing  is  determining  the  accounts  to  be  debited  and  credited 
in  any  transaction.  It  is  closely  related  to  determining  the  particular  classifica- 
tion to  which  a  transaction  belongs.  For  instance,  when  a  purchase  is  made  it 
is  classified  as  a  purchase  transaction  and  consequently  is  entered  in  the  purchases 
book.  This  is  classification.  As  a  result  of  this  entry  the  party  from  whom 
the  purchase  is  made  is  credited  in  .his  ledger  account  from  the  purchases  book 
for  the  amount,  and  purchases  account  will  be  debited  for  the  same  amount  when 
the  footing  of  the  purchases  book  is  posted,  since  it  is  included  in  that  footing. 
This  is  journalizing. 

57.  It  was  originally  the  practice  to  enter  all  transactions  in  the  journal. 
This  method  required  a  separate  debit  for  every  purchase,  a  separate  credit  for 
every  sale,  a  separate  debit  for  every  cash  receipt,  and  a  separate  credit  for  every 
cash  payment.  It  also  required  separate  postings  to  the  ledger  for  all  these 
entries.     This  is  unnecessary  when  the  purchases,  sales,  and  cash  books  are  used. 

58.  It  has  been  shown  that  posting  the  totals  of  the  purchases,  sales,  and 
cash  books  to  the  purchases,  sales,  and  cash  accounts  in  the  ledger  is  equivalent 
to  posting  each  item  separately.  In  other  words  posting  these  totals  results  in  an 
equality  of  debits  and  credits  in  the  ledger.  See  pages  26,  27,  and  28.  It  follows 
that  an  entry  in  the  purchases  book,  sales  book,  or  cash  book  is  equivalent  to  a 
journal  entry  so  far  as  the  final  result  in  the  ledger  is  concerned.  For  this  reason 
these  books  are  frequently  referred  to  as  the  purchases  journal,  sales  journal,  and 
cash  journal.  For  instance,  the  entry  in  the  purchases  book  for  the  first  purchase 
in  the  model  set  (illustration  8)  is  equivalent  to  the  following  journal  entry 

Purchases  125.00 

Samuel  Howe  125.00 


INTRODUCTION  TO  BOOKKEEPING  37 

The  entry  for  the  first  sale  is  equivalent  to  this  entry : 
W.  C.  Archer  136.00 

Sales  136.00 

The  entry  for  the  first  cash  receipt  is  equivalent  to  this  entry: 
Cash  136.00 

W.  C.  Archer  136.00 

The  entry  for  the  first  cash  payment  is  equivalent  to  this  entry: 
Samuel  Howe  125.00 

Cash  *  125.00 

59.  Thus  it  will  be  seen  that  in  whatever  book  of  original  entry  transactions 
may  be  recorded,  when  the  items  are  correctly  posted  to  the  ledger  the  sum  of  the 
debits  will  equal  the  sum  of  the  credits;  consequently  an  equality  of  debits  and 
credits  will  exist,  and  a  trial  balance  can  be  taken  from  the  ledger  accounts. 

CASH  RECEIPTS  AND  PAYMENTS 
AFFECTING  PURCHASES,  SALES,  AND  EXPENSE  ACCOUNTS 

60.  The  cash  receipts  and  payments  heretofore  considered  have  been  con- 
fined to  cash  received  or  paid  in  settlement  of  personal  accounts.  In  many  busi- 
nesses money  is  also  frequently  received  for  merchandise  sold  for  cash.  The 
receipts  from  cash  sales  are  usually  placed  in  a  cash  register  or  drawer,  and  this 
money  is  deposited  in  bank  daily  or  at  frequent  intervals.  As  such  deposits 
aire  made  the  total  sales  represented  by  the  cash  deposited  are  entered  as  one  item 
in  the  cash  book,  sales  account  being  credited. 

61.  It  would  be  possible  to  enter  cash  sales  in  the  sales  book  in  the  same 
manner  as  sales  on  account,  debiting  the  person  to  whom  the  goods  were  sold  and 
crediting  sales,  and  then  to  enter  the  cash  received  in  the  cash  book,  debiting  cash 
and  crediting  the  person.  This  method  would  require  the  opening  of  personal 
accounts  in  the  ledger  for  every  cash  sale  when  the  sales  book  postings  were  made, 
and  these  accounts  would  be  closed  immediately  by  the  postings  from  the  cash 
book.  Since  the  ledger  would  rapidly  become  filled  with  such  accounts,  cash 
sales  are  credited  directly  to  the  sales  account  from  the  cash  book,  thus  eliminating 
the  personal  accounts  and  saving  time  and  labor.  Besides,  no  indebtedness 
between  the  parties  to  a  cash  sale  similar  to  the  indebtedness  between  the  parties 
to  a  sale  on  account  exists  except  the  momentary  indebtedness  during  the  time 
between  the  delivery  of  the  article  to  the  purchaser  and  the  payment  by  him  in 
return. 

62.  Merchandise  is  also  frequently  bought  for  cash.  As  in  the  case  of  cash 
sales,  the  personal  accounts  are  eliminated  by  charging  the  purchases  account  and 
crediting  cash  directly  through  a  cash  book  entry.  The  cash  expended  for  such 
purchases  is  usually  taken  from  the  supply  of  cash  kept  on  hand  for  such  purposes. 


43257 


38 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


63.  Expenses  such  as  rent,  heat,  light,  insurance,  taxes,  salaries  and  wages 
of  employees,  office  and  store  supplies  and  stationery,  etc.,  are  always  incurred  in 
conducting  a  business.  The  bills  for  such  expense  items  are  usually  not  entered 
on  the  books  until  they  arc  paid,  at  which  time  they  are  charged  directly  to  the 
expense  account.  Some  business  men  pay  such  bills  immediately  upon  their  receipt, 
but  in  most  cases  it  is  the  practice  to  pay  them  between  the  first  and  tenth  of  each 
month.  The  parties  from  whom  expense  bills  are  received,  although  they  are 
creditors  until  these  bills  are  paid,  should  be  distinguished  from  the  parties  from 
whom  merchandise  comprising  the  stock  in  trade  is  bought.  Bills  from  such 
parties  are  for  supplies  and  services  necessary  in  the  conduct  of  the  business  and 
do  not  cover  commodities  purchased  for  resale  to  customers.  Personal  accounts 
are  not  opened  to  record  the  indebtedness  arising  out  of  expense  transactions. 
The  bills  serve  as  a  record  of  such  indebtedness  until  paid. 

exercise  6 

F.  J.  Ralston  &  Co.'s  cash  receipts  and  payments  for  November  are  given  on 
pages  39  and  40.  The  correct  entries  for  the  first  six  transactions  are  shown  at  the 
top  of  illustration  19.  Classify  the  transactions  mentally  under  the  following  classes : 

(a)  Receipt  or  payment  in  settlement  of  a  personal  account. 

(b)  Receipt  or  payment  for  merchandise  bought  or  sold. 

(c)  Payment  for  an  expense  item. 

Next  make  the  proper  entries  for  them  in  a  cash  book.  Use  a  sheet  of  journal 
paper. 

Illustration  19 — Cash  Book 

Cash  Receipts 


Nov. 


Balance 
Howard  Black 
Sales 


Bill  of  Oct.  23 
Cash  sales  to  date 


55.40 
14.25 


572.80 


Dec. 


30 
30 


Sales 

Total  Receipts 


Balance 


Cash  sales  to  date 


10.20 

876.24 

1449.04 

466.83 

INTRODUCTION   TO   BOOKKEEPING 


39 


Transactions — Exercise  6 

Nov.    1     Balance  of  cash  on  hand,  $572.80. 

1     Paid  Miles  &  Co.  in  full  for  bill  of  Oct.  2,  $26.70. 

1  Paid  the  Jones  Realty  Co.  for  rent  for  store  for  November,  $72.50. 

2  Received  cash  from  Howard  Black  for  bill  of  October  23,  $55.40. 

3  Paid  Sam  Boggs,  a  huckster,  $8.00  for  3  brls.  of  apples,  which  were 
placed  in  stock. 

5  Paid  City  Gas  &  Electric  Co.  for  gas  and  electric  light  bill  for 
October,  $5.40. 

6  Cash  sales  to  date,  $14.25. 

8  Paid  Central  Provision  Co.  on  account,  $100.00. 

9  Paid  Chesapeake  &  Potomac  Telephone  Co.'s  bill  for  telephone 
service, for  October,  $6.45. 

9  Received  cash  from  Allen  &  Boyce  for  bill  of  Oct.  21,  $226.36. 

11  Cash  sales  to  date,  $9.42. 

12  Paid  Office  Supply  Co.'s  bill  for  office  stationery  and  supplies,  $13.26. 
12  Received  cash  from  Morton  &  King  in  full  of  account  to  date,  $31 1 .78. 
17  Paid  O.  H.  Barnes  &  Co.  for  bill  of  November  8,  $175.60. 

20    Cash  sales  to  date,  $27.40. 

22  Received  cash  from  Howard  Black  in  full  of  account,  $175.19. 

23  Cash  purchases  to  date,  $34.80. 

25    Paid  Enterprise  Fuel  Co.'s  bill  for  coal,  $37.50. 


Illustration  19 — Cash  Book 


Cash  Payments 


Nov. 


Miles  &  Co. 
Expense 
Purchases 
Expense 


Bill  Oct.  2 
Rent  for  November 
Cash  purchase 
Gas  and  light  bill 


26.70 

72.50 

8.00 

5.40 

25 
30 
30 
30 
30 


Expense 

Expense 

Expense 

Total  Payments 

Balance 


Coal  Bill 

Salaries  office  force 

Manager's  salary 


37.50 
372.00 
130.00 

982.21 
466.83 

1449.04 

40  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

28    Received  cash  from  E.  Brown  &  Sons  for  bill  of  October  30,  $46.24. 

30    Paid  salaries  of  clerks  and  office  force,  $372.00. 

30    Paid  manager's  salary,  $130.00. 

30  Cash  sales  to  date,  $10.20. 
64.  The  lower  part  of  illustration  19  shows  the  manner  in  which  the  cash 
book  should  be  balanced.  The  balance  at  the  beginning  of  the  month  is  added  to 
the  total  receipts  to  get  the  total  footing  on  the  receipts  side,  just  as  the  balance 
at  the  close  of  the  month  is  added  to  the  total  payments  to  get  the  total  footing 
on  the  payments  side.  After  these  footings  are  entered  and  the  book  is  ruled,  the 
balance  at  the  close  of  the  month  should  be  brought  down  under  date  of  the  first 
day  of  the  following  month.  The  balance  on  November  1  is  entered  in  the  right- 
hand  column  so  that  the  left-hand  column  will  show  the  total  receipts  for  the 
month.     Compare  with  illustration  9,  page  14. 

SET   3 

CANNED  GOODS  BUSINESS 

The  farmers  and  truckmen  residing  in  the  vicinity  of  Jamestown,  New  York, 
have  established  a  community  canning  factory  in  that  city  under  the  name  of  the 
"Cooperative  Canning  Company." 

H.  C.  Miller,  of  Jamestown,  has  contracted  with  the  canning  company  to 
assist  in  the  marketing  of  the  output  of  the  factory.  He  will  establish  a  trade 
among  the  stores  in  Jamestown  and  nearby  towns  and  among  the  summer  resort 
hotels  located  about  Lake  Chautauqua.  That  part  of  the  factory's  product  which 
Mr.  Miller  does  not  sell  will  be  disposed  of  to  other  dealers  in  canned  goods. 

Certain  stocks  of  goods  will  be  set  aside  in  the  factory  for  Mr.  Miller,  for 
which  he  will  be  billed  at  the  time.  As  he  is  beginning  business  without  capital, 
he  will  be  allowed  a  term  of  credit  of  60  days  on  his  first  month's  purchases,  which 
will  give  him  time  to  collect  for  his  sales  before  his  bills  for  purchases  become  due. 
He  will  deliver  orders  directly  from  the  factory  to  his  customers  at  his  expense. 
His  profit  will  be  the  difference  between  the  price  to  him  at  the  factory  and  the 
price  he.  secures  from  his  customers,  less  his  expense  of  doing  business. 

His  transactions  for  the  month  of  September  are  the  following.  Record  them 
in  the  proper  books  of  original  entry.  Use  a  double  sheet  for  the  purchases,  sales, 
and  cash  books  and  a  single  sheet,  numbered  page  5,  for  the  journal. 

Transactions — Set  3 

Sept.  1  Received  bill  dated  Sept.  1,  terms  60  days,  from  Cooperative 
Canning  Co.  for  the  first  allotment  of  180  cases  of  canned  peas, 
corn,  beans,  and  tomatoes,  $624.50. 


INTRODUCTION   TO   BOOKKEEPING  41 

Sept.   2    Sold  Enos  Spencer,  Ashville,  N.  Y.,  terms  10  days,  10  cases  peas, 
30  doz.,  @  $2.00;  5  cases  corn,  15  doz.,  @  $1.75. 

Note:  Canned  goods  are  usually  packed  at  the  canning  factories  in 
cases  containing  two  or  three  dozen  cans,  depending  upon  the  size  of 
the  cans.  They  are  always  bought  and  sold  by  the  dozen  and 
should  be  billed  accordingly. 

3  Sold  for  cash  one  case  tomatoes,  $3.30. 

4  Paid  cash  for  billheads  and  postage  stamps,  $1.15. 

5  Sold  Chautauqua  Lake  Hotel,  Bay  View,  N.  Y.,  terms  20  days, 

15  cases  beans,  45  doz.,  @  $1.85;  20  cases  tomatoes,40  doz.,  @  $1.55; 
6  cases  peas,  18  doz.,  @  $2.05. 

8  Received  cash  from  Enos  Spencer  in  full  for  bill  of  Sept.  2,  $86.25. 

9  As  Mr.  Miller  secured  an  order  for  canned  cherries  and  the  canning 
company  had  none  in  stock,  he  bought  5  cases  for  cash,  $18.00. 

11  Sold  Peter  Duff,  Bemus  Point,  N.  Y.,  terms  20  days,  25  cases  corn, 
75  doz.,  @  $1.75;  20  cases  tomatoes,  40  doz.,  @  $1.57£;  12  cases 
peaches,  24  doz.,  @  $2.05;  5  cases  cherries,  10  doz.,  @  $2.55. 

12  Paid  cash  for  warehouse  tools,  $13.60. 

13  Received  bill  dated  Sept.  11,  terms  60  days,  from  Cooperative 
Canning  Co.  for  50  cases  of  canned  peaches  and  pears  purchased  on 
that  date,  $181.00. 

16  Sold  for  cash  2  cases  peas,  $12.00,  and  one  case  pears,  $4.90;  total 
$16.90. 

17  Sold  Chautauqua  Lake  Hotel,  terms  30  days,  8  cases  peaches, 

16  doz.,  @  $2.62£;  8  cases  pears,  16  doz.,  @  $2.55;  10  cases  corn, 
30  doz.,  @  $1.75. 

18  Peter  Duff  returned  for  credit  10  cases  corn,  30  doz.,  sold  to  him  on 
Sept.  11.  In  placing  this  order  he  overlooked  a  reserve  stock  he 
had  on  hand.     Mr.  Miller  has  given  him  credit  for  $52.50. 

20    Sold  Enos  Spencer,  terms  30  days,  15  cases  peas,  45  doz.,  %  $2.00; 

20  cases  corn.  60  doz.,  @  $1.72£;  10  cases  beans,  30  doz.,  @  $1.85. 
22    Chautauqua  Lake  Hotel  claims  an  overcharge  of  15?f  per  dozen  on 

the  8  cases  of  pears  sold  on  Sept.  17.     As  the  price  agreed  upon  was 

$2.40,  Mr.  Miller  has  allowed  a  rebate  on  24  dozen  amounting  to 

$3.60. 

24  Received  cash  from  Chautauqua  Lake  Hotel  in  full  for  bill  of 
Sept.  5,  $182.15. 

25  Enos  Spencer  reported  that  1  case  of  corn  sold  him  on  Sept.  2  was 
spoiled.  Investigation  showed  that  it  was  a  case  from  last  year's 
pack  which  in  some  manner  was  placed  with  Mr.  Miller's  stock. 
He  allowed  Mr.  Spencer  a  rebate  at  the  selling  price,  $5.25. 


42  ACCOUNTANCY  AND   BUSINESS  MANAGEMENT 

Sept.  25    Mr.  Miller  reported  the  case  of  spoiled  corn  to  the  canning  company 
and  was  allowed  a  rebate  for  the  cost  price,  $4.20. 

26  As  the  canning  company's  stock  of  peaches  is  exhausted,  Mr.  Miller 
has  purchased  a  supply  from  the  Dunkirk  Cannery,  Dunkirk,  N.  Y., 
and  received  their  bill  dated  Sept.  20,  terms  30  days,  for  $38.00. 

27  Sold  for  cash  to  John  Ensor,  Ross  Mill,  N.  Y.,  8  cases  peas 
and  5  cases  beans,  total  sale  $70.65.  Mr.  Ensor  was  given  reduced 
prices  on  this  order  because  he  paid  cash  and  called  for  the  goods 
with  bis  own  truck. 

29  As  Mr.  Miller  found  it  difficult  to  sell  pears  and  the  canning  company 
has  found  a  broker  who  will  purchase  their  entire  stock,  Mr.  Miller 
has  returned  21  cases,  42  doz.,  to  the  Cooperative  Canning  Co.  and 
has  received  credit  for  them  at  the  cost  price,  $1.75,  total  $73.50. 

29  Sold  Central  Hotel,  Hartfield,  N.  Y., terms  30  days,  9  cases  tomatoes, 
18  doz.,  @  $1.55;  10  cases  peaches,  20  doz.,  @  $2.65;  9  cases  peas, 
27  doz.,  @-$1.95. 

30  Mr.  Miller  paid  the  canning  company  the  September  rent  for  the 
space  in  their  warehouse  occupied  by  his  stock,  $12.50. 

30    Peter  Duff's  bill  of  Sept.  1 1  less  the  credit  of  Sept.  18  is  due  tomorrow. 

As  Mr.  Duff  cannot  pay  the  balance  in  full,  Mr.  Miller  has  accepted 

a  payment  of  $150.00  and  granted  Mr.  Duff  an  extension  of  15  days 

on  the  balance. 
30    Paid  Cooperative  Canning  Co.,  to  apply  on  account,  $250.00. 
30    Paid  drayage  bill  of  Jamestown  Transfer  Co.  for  delivering  orders 

to  customers  during  September,  $35.80. 
30    Mr.  Miller  took  out  as  his  salary  for  September,  $100.00. 

After  entering  the  above  transactions,  foot  and  rule  the  books  with  the  excep- 
tion of  the  journal.  Balance  the  cash  book  in  the  manner  shown  in  illustration  19. 
The  journal  is  not  ruled  and  footed  because  totals  are  not  posted  from  this  book. 

Then  post  from  the  purchases  book,  sales  book,  journal,  and  cash  book  in 
the  order  named,  using  a  single  sheet  for  the  ledger,  numbering  the  pages  1  and  2, 
and  allowing  8  lines  for  each  account.  Post  the  individual  items  first  and  then  the 
totals.  In  posting  to  the  purchases,  sales,  and  expense  accounts,  write  an  appro- 
priate explanation  of  each  item  such  as  "Cash  purchase,"  "Cash  sale,"  "Return," 
"Rebate,"  "Office  supplies,"  "Tools,"  "Pchs.  Bk.  total,"  or  "Sales  Bk.  total" 
in  the  explanation  column. 

After  posting,  find  the  balance  of  each  account  as  previously  instructed.  Then 
take  a  trial  balance,  and  present  all  papers  to  the  teacher  for  approval.  Save  them 
carefully  for  future  reference  when  they  are  returned. 


introduction  to  bookkeeping  43 

Statement  of  Income 

65.  Mr.  Miller  sold  all  the  goods  purchased  during  the  month.  The  accounts 
in  the  trial  balance  showing  the  results  from  which  his  profits  are  to  be  ascertained 
are  the  purchases,  sales,  and  expense  accounts.    His  profit  is  determined  thus : 

Income  from  goods  sold  $1099.10 

Cost  of  goods  sold  783.80 

Gross  Trading  Profit  315.30 

Expenses  163.05 

Net  profit             \  152.25 

STATEMENT  OF  INCOME  AND  PROFIT  AND  LOSS 

66.  Such  a  statement  as  the  above,  containing  trial  balance  figures  only,  does 
not  provide  all  the  essential  details  of  results  from  operations.  It  is  the  custom, 
therefore,  in  preparing  such  statements,  to  include  a  detailed  analysis  of  the 
accounts  showing  incomes,  costs,  and  expenses  so  as  to  show  all  the  units  of  infor- 
mation, facts,  and  figures  relating  to  the  business  transacted.  This  statement  of 
income  and  profit  and  loss  plays  a  most  important  part  in  the  decisions  of  the 
management  with  regard  to  future  operations  and  business  policies,  because  it 
demonstrates  to  what  extent  past  policies  and  methods  of  operation  have  been 
successful  or  unsuccessful. 

67.  The  statement  on  page  44,  showing  the  same  final  result  as  the  one  above, 
was  prepared  from  the  same  trial  balance  and  from  the  data  shown  by  the 
purchases,  sales,  and  expense  accounts  in  the  ledger.  It  supplies  in  approved 
form  the  information  lacking  in  the  first  statement. 

ANALYSIS  OF  INCOME  AND  PROFIT  AND  LOSS  STATEMENT 

1.  This  statement  is  divided  into  three  sections  under  the  captions  "In- 
come from  Sales,"  "Cost  of  Goods  Sold,"  and  "General  Expenses." 

2.  The  sales  account  is  analyzed  in  the  "income  from  sales"  section.  The 
total  sales  is  the  credit  footing  of  the  account.  The  items  under  deduc- 
tions from  sales  are  the  returned  sales  debited  to  the  account  on  September 
18,  and  the  sum  of  the  rebates  on  sales  debited  on  September  22  and  25. 
The  difference  between  the  total  sales  and  the  sum  of  the  deductions  is  the 
net  income  from  sales. 

3.  The  purchases  account  is  analyzed  in  the  "cost  of  goods  sold"  section. 
The  debit  footing  of  the  account  shows  the  total  purchases.  The  items  under 
deductions  from  purchases  are  the  purchases  returned  credited  to  the  account 


44 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


Illustration  20 — Income  and  Profit  and  Loss  Statement 
Statement  of  Income  and  Profit  and  Loss,  September  30,  19 


H.  C.  Miller 


6. 


Income  from  Sales: 
Total  sales 

Deductions  from  sales: 

Returns  52.50 

Rebates  and  allowances         8 .  85 
Net  income  from  sales 

Cost  of  Goods  Sold : 
Total  purchases 

Deductions  from  cost 

Returns  4.20 

Rebates  and  allowances       73 .  50 
Net  cost  of  goods  sold 
Gross  Trading  Profit 


1160.45 


61.35 


861.50 


77.70 


14.75 

12.50 

35.80 

100.00 


1099.10 


783.80 


315.30 


163.05 


152.25 


General  Expenses: 

Tools  and  supplies 
Rent 

Drayage  charges 
Proprietor's  salary 
Total  expenses 

Net  profit  for  the  period 

i  " 

on  September  29,  and  the  rebate  on  purchases  credited  on  September  25. 
Since  all  of  the  goods  purchased  have  been  sold,  the  difference  between  the 
total  purchases  and  the  sum  of  the  deductions  is  the  net  cost  of  goods  sold. 
The  difference  between  the  net  income  from  sales  and  the  net  cost  of 
goods  sold  is  the  gross  profit  resulting  from  the  buying  and  selling,  or 
trading,  operations  and  is  therefore  designated  as  the  gross  trading  profit. 
The  expense  account  is  analyzed  in  the  "general  expenses"  section.    Gen- 
eral expenses  are  the  expenditures  for  services,  materials,  and  supplies 
required  in  conducting  the  business  as  a  whole.     Notice  that  the  first  two 
items  in  the  expense  account  are  grouped  in  the  statement  as  "tools 
and  supplies." 

The  difference  between  the  gross  trading  profit  and  the  general  expenses  is 
the  net  profit  resulting  from  the  conduct  of  the  business. 


INTRODUCTION   TO   BOOKKEEPING 


45 


7.  Observe  that  the  net  income  from  sales  and  the  net  cost  of  goods  sold 
are  the  same  amounts  respectively  as  the  balances  of  the  sales  and 
purchases  accounts  in  the  trial  balance. 

8.  If  the  general  expenses  had  exceeded  the  gross  trading  profit,  the  dif- 
ference would  have  been  the  net  loss.  If  the  net  cost  of  goods  sold  had 
exceeded  the  net  income  from  sales,  the  difference  would  have  been  the 
gross  trading  loss,  in  which  case  the  general  expenses  would  have  been 
added  to  the  gross  trading  loss  to  find  the  net  loss. 

9.  Observe  that  the  preparation  of  this  statement  depends  upon  an  orderly 
and  proper  arrangement  of  the  items  and  correct  addition  and  subtrac- 
tion. The  statement  is  really  a  systematically  arranged  solution  of  an 
arithmetical  problem  containing  a  proper  explanation  of  each  item  in  the 
solution. 

SET    3— CONTINUED 

From  the  trial  balance  and  ledger  for  set  3  prepare  a  statement  of  income  and 
profit  and  loss,  and  a  statement  of  assets  and  liabilities.  Refer  to  illustrations 
20  and  17  if  necessary  for  the  proper  arrangement  of  the  items.  Then  submit  the 
statements  to  the  teacher  for  approval.     This  completes  the  work  of  set  3. 

exercise   7 

From  the  following  trial  balance  and  ledger  accounts,  prepare  the  proper 
statements  and  present  them  to  the  teacher  for  approval : 


Trial  Balance,  June  30,  19 

A.  B.  Mellon 


Browning  &  Co. 

31628 

Frank  Ward 

17685 

Lee  C.  Lang  Co. 

26.20 

Hudson  Grocery  Co. 

119.76 

R.  C.  Lake 

122.17 

Marton  &  King 

59.60 

Samuel  Balke 

38.40 

Butler  &  Co. 

116.22 

Purchases 

876  93 

Sales 

1182.45 

Expense 

168.44 

Cash 

152.91 
1678.09 

1678.09 

Purchases 


Cash  Purchase  20.00 

Cash  purchase  5.60 

Pchs.  Bk.  total        927.51 


Rebate 
Return 
Rebate 


Sales 


5.25 
41.80 
29.16 


Rebate 

9.25 

Cash  sale 

5.80 

Return 

1.60 

Cash  sale 

3.20 

Rebate 

2.35 

Cash  sale 

8.46 

Rebate 

5.21 

Sales  Bk.  total 

1186.40 

Return 

3.00 

Expense 

Gas  and  light 

7.84 

Drayage  charges 

24.75 

Rent 

30.00 

Sundry  repairs 

15.85 

Prop,  salary 

90.00 

46  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

EXERCISE  8 

Refer  to  the  comparison  of  classified  entries  and  journal  entries  on  pages  36 
and  37  of  the  text.  From  this  comparison  it  will  be  observed  that  the  entry  for  any 
transaction  can  be  set  up  in  journal  form.  For  practice  in  determining  the  debit 
and  credit  items  arising  out  of  transactions,  make  journal  entries  for  all  of  the 
transactions  in  set  3.  In  other  words,  work  the  set  again  using  the  journal  as  the 
only  book  of  original  entry.     Omit  all  explanations.    This  is  a  journalizing  drill. 

After  all  the  entries  are  made,  post  them  to  a  new  set  of  ledger  accounts  just  as 
the  items  from  the  journal  in  the  classified  or  regular  set  were  posted.  Allow 
twelve  lines  for  the  sales  and  cash  accounts  and  eight  lines  for  the  other  accounts. 
Then  take  a  trial  balance.    It  should  agree  with  the  trial  balance  of  the  classified  set. 

With  both  sets  before  you,  prepare  the  answers  to  the  following  questions : 

Comparison  of  Classified  and  Journalized  Sets 

1.  Count  the  individual  debit  and  credit  entries  in  the  classified  set.  How 
many  are  there? 

2.  How  many  postings  to  the  ledger  were  required  in  this  set? 

3.  Count  the  individual  debit  and  credit  entries  in  the  journalized  set. 
How  many  are  there? 

4.  How  many  postings  to  the  ledger  were  required  for  this  set? 

5.  Considering  each  individual  entry  and  its  posting  to  the  ledger  as  two 
operations,  how  many  operations  were  required  to  record  and  post  the 
transactions  in  the  classified  set  and  how  many  in  the  journalized  set? 

6.  With  respect  to  the  number  of  such  operations,  how  much  more  efficient 
on  a  percentage  basis  is  the  classified  set? 

7.  Do  the  accounts  in  the  two  ledgers  show  the  same  balances  respectively? 
Do  they  show  the  same  items  respectively? 

8.  Are  there  any  differences  between  the  personal  accounts  in  the  two 
ledgers  with  respect  to  the  number  and  amounts  of  the  items  entered 
therein? 

9.  How  do  you  account  for  the  differences,  if  any,  between  the  purchases,  sales, 
cash,  and  expense  accounts  in  the  two  ledgers  with  respect  to  the  number 
and  amounts  of  the  items  entered  therein? 

68.  From  the  above  comparison  it  will  be  observed  that  while  the  processes 
of  recording  transactions  differ,  the  same  final  results  are  shown  by  the  classified 
and  journalized  sets;  also  that  the  classified  set  is  the  more  efficient  method  because 
of  the  saving  in  time  and  effort  in  making  entries  and  posting  them. 


ELEMENTARY   ACCOUNTING  47 

ELEMENTARY  ACCOUNTING 

In  the  section  of  the  text  devoted  to  Elementary  Accounting,  which  begins 
on  the  next  page,  there  is  provided : 

(a)  The  text  matter  correlating  with  the  material  of  Laboratory  Unit  One, 
to  which  the  student  is  referred  as  he  proceeds  with  the  work  of  that 
.unit,  after  having  completed  the  work  in  the  "Introduction  to  Book- 
keeping" covering  the  first  46  pages  of  this  text. 

(b)  The  text  material,  pages  47  to  127,  required  when  it  is  desired  to  start  the 
study  of  the  subject  by  the  ledger  account  method,  which  when  completed 
is  followed  by  the  study  of  the  Introduction  to  Bookkeeping,  or  Labo- 
ratory Unit  One,  as  the  judgment  of  the  teacher  dictates  and  the  time 
available  permits. 

The  following  schedule  gives  a  list  of  the  accounts  treated  in  the  section  of 
the  text  devoted  to  Elementary  Accounting  and  the  classification  required  for 
Unit  One: 

ASSET,  LIABILITY,  AND  CAPITAL  ACCOUNTS 
Current  Assets:  .  Current  Liabilities: 

cash  notes  payable 

merchandise  inventory  creditors'  accounts  payable 

notes  receivable 

debtors'  accounts  receivable  Capital: 
Fixed  Capital  Assets:  proprietor's  capital  account 

REAL  ESTATE  INVESTMENT  PROPRIETOR'S  PERSONAL  ACCOUNT 

FURNITURE  AND  FIXTURES  INVESTMENT 

INCOME  AND  PROFIT  AND  LOSS  ACCOUNTS 

Cost  of  Goods  Sold:  Income  from  Sales: 

purchases  sales 

freight  in 

warehouse  expense  additions  to  income : 

Operating  Expenses:  interest  income 

general  expense  real  estate  income 

real  estate  expense 
Deductions  from  Income 

INTEREST  EXPENSE 


48  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

ELEMENTARY  ACCOUNTING 

PRINCIPLES  AND  PRACTICE 

69.  A  business  transaction  is  a  matter,  affair,  or  item  of  business  completed 
or  in  process  of  completion.  A  financial  transaction  is  a  business  transaction 
which  involves  an  amount  to  be  recorded  in  the  books  of  account. 

70.  Transactions  result  from  an  agreement,  or  contract,  between  two  parties. 
Each  party  under  the  terms  of  an  agreement  obligates  himself  to  do  certain  things. 
For  instance,  a  seller  obligates  himself  to  sell  certain  goods  at  a  certain  price 
and  to  ship  or  deliver  them  to  the  purchaser.  The  buyer  obligates  himself  to 
accept  delivery  of  the  goods  he  purchases  and  to  pay  the  seller  for  them. 

71.  "A  contract  is  an  agreement  (oral  or  written)  between  competent 
parties  upon  a  legal  consideration  to  do  or  not  to  do  some  lawful  act  or  thing." — 
Rowe's  Commercial  Law. 

72.  When  both  parties  to  a  contract  discharge  their  obligations  at  the 
same  time,  they  usually  fulfil  the  terms  of  their  agreement  in  one  transaction. 
Frequently,  however,  one  party  does  not  "perform  his  part  of  the  agreement  until 
some  time  after  the  other  party  has  done  so.  The  first  party  thus  becomes 
indebted  to  the  other  until  he  does  perform  his  part  and  thereby  discharges  his 
obligation  under  the  agreement.  In  such  cases,  two  or  more  transactions  are 
required  to  carry  out  the  terms  of  the  agreement. 

73.  Obligations  or  debts  are  thus  created  and  discharged  by  the  parties 
to  the  transactions  which  result  from  agreements  between  them.  Records  of  the 
creation  and  discharge  of  such  obligations  or  debts  are  kept  in  personal  accounts. 

PERSONAL  ACCOUNTS 

74.  Personal  Accounts  are  accounts  kept  with  debtors  and  creditors.  The 
object  in  keeping  personal  accounts  is  to  ascertain  what  our  debtors  owe  us  on 
account,  and  what  we  owe  creditors  on  account  at  any  time.  The  book  in  which 
accounts  are  kept  is  called  the  ledger. 

75.  A  debtor  is  one  who  owes  or  is  in  debt.  The  amounts  he  owes  are 
known  as  debit  items  in  the  account  kept  with  him  by  his  creditor. 

76.  A  creditor  is  one  who  is  owed.  The  amounts  that  are  owed  to  him  are 
known  as  credit  items  in  the  account  kept  with  him  by  his  debtor. 

77.  Only  persons  can  be  debtors  and  creditors  and  the  terms  debit  and  credit 
in  the  sense  of  owing  or  being  owed  can  be  used  only  in  connection  with  personal 
accounts.  All  accounts  with  individuals,  firms,  or  corporations  showing  amounts 
owed  to  or  by  them  are  treated  as  personal  accounts  for  bookkeeping  purposes. 


ELEMENTARY  ACCOUNTING 


49 


ACCOUNTS  WITH  DEBTORS 

78.  Accounts  with  debtors  are  those  kept  with  parties  who  owe  us  and  who 
will  later  cancel  their  indebtedness  by  paying  us  the  amounts  they  owe.  They  will 
then  cease  to  be  our  debtors. 

The  following  transactions  with  A.  J.  Cloud  are  correctly  recorded  in  the 
account  with  him  which  appears  below: 

Oct.   12  Sold  him  merchandise,  terms  10  days,  $375.80. 

20  Sold  him  merchandise,  terms  30  days,  $162.75. 

23  Received  cash  from  him  for  bill  of  October  12,  $375.80. 

31  Sold  him  merchandise,  terms  30  days,  $441.20. 

Nov.  19  Received  cash  from  him  for  bill  of  October  20,  $162.75. 


Illustration  21 — Debtor's  Account 


r^-r/^ 7?£  fa^^Jt-stfy^te 


~o£. 


Jo  aCj 


t 

V 


3  7J- 


/C2 


VV/  Xo 


re 


2£. 


1. 

2. 
3. 

4. 
5. 


ANALYSIS 

Is  this  an  account  with  a  debtor  or  a  creditor? 

For  what  amounts  did  Mr.  Cloud  become  indebted  to  us? 

How  much  of  tins  indebtedness  has  been  paid  and  canceled? 

How  much  remains  unpaid? 

Is  Mr.  Cloud  a  debtor  or  creditor  for  this  amount? 


79.  It  is  therefore  evident  that  in  accounts  with  debtors  there  are  two  classes 
of  items— debit  items  for  the  amounts  for  which  they  have  become  indebted  to  us, 
and  credit  items  which  wholly  or  partially  cancel  such  indebtedness.  As  a  matter 
of  custom,  debit  items  are  always  entered  on  the  left-hand  side  and  credit  items 
on  the  right-hand  side  of  ledger  accounts.  Canceling,  or  balancing,  items  are 
ruled  out  when  they  are  entered,  as  shown  in  illustration  21. 

Rules  for  Debiting  and  Crediting  Accounts  with  Debtors 


80.     Debit  their  accounts  for  all 
amounts  they  owe  us. 


81.  Credit  their  accounts  for  all 
items  which  wholly  or  partially  cancel 
debit  items  in  their  accounts. 


50  ACCOUNTANCY  AND   BUSINESS  MANAGEMENT 

EXERCISE  9 

Prepare  an  account  from  the  following  transactions  with  Robert  G.  Burns, 
120  N.  Eutaw  St.,  City.    Rule  out  balancing  items  as  they  are  entered. 

Sept.    2  Sold  him  merchandise,  $40.00 

4  Sold  him  merchandise,  $126.42. 

9  Received  cash  for  bill  of  Sept.  2,  $40.00. 

10  He  returned  goods  for  credit  on  bill  of  Sept.  4,  $12.30. 

12  Sold  him  merchandise,  $56.20. 

14  Received  cash  for  balance  due  on  bill  of  Sept.  4,  $114.12. 

15  Sold  him  merchandise,  $125.90. 

16  Billed  him  for  undercharge  on  bill  of  Sept.  15,  $3.68. 
23  Sold  him  merchandise,  $176.80. 

27    Allowed  him  credit  for  defective  goods  on  bill  of  Sept.  12,  $7.50. 

exercise  10 

Transactions  with  Bell  Bros.,  19  Exchange  Way,  Columbus,  Ohio. 

Oct.    1  Sold  them  merchandise,  $126.40. 

2  Billed  them  for  freight  prepaid  on  goods  billed  Oct.  1,  $5.42. 

7  Sold  them  merchandise,  $198.25. 

8  Allowed  them  credit  for  overcharge  on  bill  of  Oct.  1,  $9.36. 

12  Received  cash  for  balance  due  on  bill  of  Oct.  1,  including  freight 

charged  thereon,  $122.46. 

15  Sold  them  merchandise,  $272.80. 

17  They  billed  us  for  goods  returned  for  credit  on  bill  of  Oct.  7,  $17.09. 

23  Sold  them  merchandise,  $85.40. 

24  Billed  them  for  express  charges  prepaid  on  bill  of  Oct.  23,  $4.75. 
27  Received  cash  for  bill  of  Oct.  15,  $272.80. 

30    Received  bill  from  them  for  shortage  on  bill  of  Oct.  23  and  allowed 
credit,  $3.75. 

ACCOUNTS  WITH  CREDITORS 

82.  Accounts  with  creditors  are  those  kept  with  parties  whom  we  owe  and 
to  whom  we  will  later  cancel  our  indebtedness  by  paying  them  the  amount  we  owe. 
They  will  then  cease  to  be  our  creditors. 

The  following  transactions  with  the  John  S.  Wilson  Company  are  correctly 
recorded  in  the  account  with  them  which  appears  on  the  next  page : 

Aug.  12    Bought  merchandise  from  them  per  bill  of  Aug.  6,  terms  30  days, 

$74.20. 
Sept.    3    Bought  merchandise  from  them  per  bill  of  Aug.  30,  terms  30  days, 

$316.12. 
Sept.   5    Paid  them  cash  for  bill  of  August  6,  $74.20. 


ELEMENTARY  ACCOUNTING 


51 


Illustration  22 — Creditor's  Account 


U$t< 


s 


c- 


7±£ 


UL 


<Zo<^.  JO,  Joctf.  P\ 


34. 


3/  i, 


ZCL. 


/z 


ANALYSIS 


Is  this  an  account  with  a  debtor  or  a  creditor? 

For  what  amounts  did  we  become  indebted  to  the  John  S.  Wilson  Co.? 

How  much  of  this  indebtedness  has  been  paid  and  canceled? 

How  much  remains  unpaid? 

Is  the  John  S.  Wilson  Co.  a  deotor  or  creditor  for  this  amount? 


83.  It  is  evident  that  in  accounts  with  creditors  there  are  two  classes  of 
items— credit  items  for  the  amounts  for  which  we  have  become  indebted  to  them, 
and  debit  items  which  wholly  or  partially  cancel  such  indebtedness. 

Rules  for  Debiting  and  Crediting  Accounts  with  Creditors 


85.    Credit  their  accounts  for  all 
amounts  owed  to  them. 


84.  Debit  their  accounts  for  all 
items  which  wholly  or  partially  cancel 
credit  items  in  their  accounts. 

exercise  11 

Prepare  an  account  from  the  following  transactions  with  M.  C.  Morgan,  1242 
Eighth  Ave.,  City.    Rule  out  cancelling  items  as  they  are  entered. 

Sept.    3  Bought  merchandise  from  him,  $342.50. 

7  Bought  merchandise  from  him,  $72.16. 

10  Paid  cash  for  bill  of  Sept.  3,  $342.50. 

12  Received  credit  for  goods  returned  on  bill  of  Sept.  7,  $12.40. 

15  Bought  merchandise  from  him,  $158.55. 

19  Paid  cash  for  balance  due  him  on  bill  of  Sept.  7,  $59.76. 

21  Bought  merchandise  from  him,  $221.20. 

24  Billed  him  for  overcharge  on  bill  of  Sept.  15,  $28.80. 

28  Bought  merchandise  from  him,  $36.25. 

30  Received  credit  for  damaged  goods  on  bill  of  Sept.  21,  $11.80. 

exercise  12 
Transactions  with  Rodney,  Gates  &  Co.,  12  Pine  St.,  Philadelphia,  Pa. 

Oct.    2    Bought  merchandise  from  them,  $278.50. 

3    Received  bill  for  freight  prepaid  on  bill  of  Oct.  2,  $21.46. 
7    Bought  merchandise  from  them,  $109.21. 


52  ACCOUNTANCY   AND   BUSINESS   MANAGEMENT 

Oct.   8    Billed  them  for  goods  returned  because  they  were  not  of  grade 
ordered,  £35.27. 
8    Paid  cash  for  balance  due  them  on  bill  of  Oct.  2,  $264.69. 

10  Bought  merchandise  from  them,  $326.18. 

11  Billed  them  for  freight  on  bill  of  Oct.  7  which  they  were  to  prepay 
according  to  the  terms  of  the  purchase,  $5.92. 

12  Bought  merchandise  from  them,  $158.20. 

20  Received  credit  for  overcharge  on  bill  of  Oct.  12,  $28.80. 

22  Paid  them  balance  due  on  bill  of  Oct.  7,  $103.29. 

26  Bought  merchandise  from  them,  $37.50. 

30  Paid  balance  due  on  bill  of  Oct.  12,  $120.40. 

86.  The  balance  of  an  account  is  the  difference  between  the  sum  of  the 
debits  and  the  sum  of  the  credits.  When  the  balance  of  a  personal  account  is 
to  be  determined,  canceled  items  usually  may  be  eliminated  from  the  calculation, 
in  which  case  the  difference  between  the  sums  of  the  uncanceled  items  on  the 
two  sides  of  the  account  is  the  balance  of  the  account. 

What  the  Balance  of  a  Personal  Account  Shows 

87.  The  balance  of  a  personal  account  is  the  amount  owed  to  us  or  by  us. 
If  the  debit  side  is  the  larger  the  balance  is  the  amount  owed  to  us,  which,  if 
it  is  not  past  due,  is  current  asset.  Current  assets  are  cash  and  other  assets  which 
can  be  quickly  converted  into  cash.  If  the  credit  side  is  the  larger  the  balance  is 
the  amount  owed  by  us,  which  is  a  current  liability.  Current  liabilities  are  short- 
time  debts.  In  either  case  the  balance  should  appear  as  an  item  in  the  statement 
of  assets  and  liabilities.  Accounts  with  debtors  and  accounts  with  creditors  are 
often  referred  to  as  accounts  receivable  and  accounts  payable,  respectively. 

Ruling  Personal  Accounts 

88.  The  proper  ruling  for  a  personal  account  depends  upon  the  method 
followed  in  the  payment  of  bills.  Bills  are  usually  paid  in  one  of  four  ways:  (a) 
each  item  or  bill  may  be  paid  separately;  (6)  several  items  or  bills  may  be  paid  at 
one  time;  (c)  one  item  or  bill  may  be  paid  in  two  or  more  payments,  and  (d)  pay- 
ments may  be  made  "on  account"  but  not  in  full  settlement  of  any  particular 
item  or  bill.  The  latter  is  the  method  employed  in  "running  accounts."  Any 
one  or  more  of  these  various  methods  of  payment  may  be  shown  in  a  single 
account.  The  following  accounts  illustrate  the  various  methods  of  payment  re- 
ferred to  and  the  proper  rulings  for  each. 

Explanation.  The  Park  Grocery  Co.  account  illustrates  the  methods  of 
payments  described  in  ^[88a  and  ^[88b.  It  shows  that  the  item  debited  March 
6  was  paid  March  16,  that  the  item  debited  March  12  was  paid  March   23,  and 


ELEMENTARY   ACCOUNTING 


53 


Illustration  23 


^>y-A/-ry^  J?^ 


jjfgv^M 


TlVasr. 


CZjb<r. 


6 
/2- 

rs 

*? 

24 


7?z^c^£y 


3« 


/  <?f 


Lg_ 


?3 
/  2 


it  t 

15- 


?H^r. 


a^. 


-j&zjJl/ 


JJiL 


/Of 


JJL 


hUL. 


zL. 


12- 


that  the  item  debited  March  15  was  paid  March  39.  The  items  of  March  25 
and  29  were  paid  April  7  in  one  amount.  The  lines  were  ruled  underneath  the 
balancing  items  as  each  credit  entry  was  made.  The  items  of  April  5  and  24 
are  unpaid,  and  their  sum,  shown  in  pencil  figures,  is  the  balance  of  the  account. 
This  is  an  account  receivable. 


Illustration  24 


j%>^/^.sf/*~***>^Ssj4<jhM,f&fr'    /Jr£2£L?^ 


JJZ, 


s 


JZz^JiS 


VJt 


?jT 


'7 


J^b, 


3 

30 


7?2^€3^U^ 


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2-3 


V3 


/  / 

s  f 


u 


Explanation.  The  items  of  August,  12,  16,  and  25  are  for  purchases  which 
were  paid  in  one  amount  September  5,  at  which  time  the  lines  were  ruled  under 
the  balancing  items.  The  pencil  footing  on  the  credit  side  shows  the  balance  of 
the  account  on  September  30.  This  is  an  account  payable.  It  illustrates  the 
method  of  payment  described  in  ^[88b. 

Explanation.  An  examination  of  the  entries  in  Gordon  &  Buchanan's  account 
in  the  order  of  their  dates  will  explain  the  rulings  shown.  It  is  an  account  receivable 
and  illustrates  the  practice  of  many  bookkeepers.  It  will  be  noticed  that  when 
all  items  balance  above  a  given  point  they  are  ruled  out,  as  shown  by  those  marked 
"a,"  "6"  and  "c,"  whether  they  are  on  the  same  line  or  not.  The  letters  also 
show  the  method  of  indicating  canceling  items.  The  balance  is  found  by  taking 
the  difference  between  the  two  sides  of  the  account  after  the  canceled  items  are 


54 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


excluded,  as  shown  in  the  small  pencil  figures  in  the  left  hand  explanation  column. 
This  account  illustrates  the  methods  of  payment  described  in  1188b,  c,  and  d. 

Note:  The  small  cross  mark  (x)  may  be  used  for  indicating  canceling  items 
instead  of  letters. 


Illustration  25 


J%-<rf^/^mS  *¥^A^hssT^^7^^X»l^/ 


-~?/vT/r.",/y--,i'/r 


f9 


Tft^ 


7?lc£4^ 


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£-0 


to 

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20 
£2. 


'7 


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-7 

30 

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25 
29 


J2&U&/ 


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J  6 


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89.  A  debtor  may  overpay  what  he  owes,  in  which  case  the  amount  overpaid 
becomes  a  credit  balance  in  the  debtor's  account.  He  becomes  a  creditor  until 
the  overpayment  is  canceled.  In  like  manner  a  creditor  would  become  a  debtor 
until  the  amount  overpaid  to  him  is  returned  or  otherwise  canceled. 

90.  Mixed  personal  accounts  are  accounts  of  persons  who  both  buy  from  and 
sell  to  each  other;  consequently  they  show  both  debtor  and  creditor  items  with 
the  corresponding  canceling  items.  It  is  not  good  accounting  practice  to  keep 
mixed  accounts.  The  best  practice  is  to  keep  separate  debtor  and  creditor 
accounts.  Indicating  canceling  items  by  letters,  as  explained  above,  will  be  found 
exceedingly  helpful  in  analyzing  and  adjusting  such  accounts.  Illustration  26 
shows  a  mixed  personal  account,  and  a  proper  segregation  of  the  items  in  separate 
debtor  and  creditor  accounts, 


Illustration  26 


r^y 


&/£7%tfi>c4. 


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'9 

JO 

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P 

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23 

ft 

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220 

CkT 

30 

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20 

Ca^lAy                   Cs 

cz^, 

i/OO 

oo 

CCcsC*^ 

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30 

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t/oo 

oo 

ELEMENTARY  ACCOUNTING 


55 


Illustration  26 — Continued 


64*-»-tA' 


tr 

20 


J 
J 
J 


& 


&JLU  <^iAtS     (A***,) 


3</C 
J/2 
220 


PJ.A 


4-00 


'7 


3.^ 


P 


/oo 

ZOO 

zoo 
^oc 


00 
00 
00 
00 


/srs  ¥0 
vrj  23 


OWNERSHIP  ACCOUNTS 


91.  An  investment  of  funds  or  property  by  the  owner  of  a  business  is  usually 
necessary  to  provide  working  capital  to  finance  his  operations,  and  to  secure  his 
creditors  for  the  payment  of  debts  which  he  may  contract  with  them.  Such 
investments  of  capital  may  be  increased  by  additional  investments  or  they  may 
be  decreased  by  withdrawals  of  funds  at  any  time  the  owner  may  so  desire  or 
circumstances  permit. 

92.  Business  is  conducted  to  earn  profits.  If  profits  are  allowed  to  remain  in 
the  business,  they  increase  the  proprietor's  invested  capital.  Losses  must  be  met 
out  of  the  owner's  capital,  and  hence  decrease  it.  Profits  which  are  withdrawn  as 
they  are  earned  and  ascertained  do  not  affect  invested  capital  one  way  or  the  other. 

93.  Invested  capital  is  the  excess  of  assets  over  liabilities.  It  represents  the 
owner's  interest  or  equity  in  the  assets  of  his  business  after  all  claims  of  creditors, 
which  are  represented  by  the  liabilities,  have  been  paid. 

94.  Usually  the  owner  should  have  two  accounts— a  capital  account  showing 
his  interest  in  the  business,  and  a  personal  account.  In  the  capital  account  only 
those  items  affecting  the  permanent  investment  of  the  owner  should  be  recorded. 
His  personal  account  should  receive  entries  for  only  such  items  as  withdrawals  of 
money  for  salary  or  temporarily  on  account,  goods  taken  for  private  use,  etc. 

Owner's  Capital  Account 

95  This  account,  while  widely  different  in  its  purpose,  is  kept  much  like  an 
ordinary  personal  account.  It,  however,  is  affected  by  the  profits  and  losses 
resulting  from  and  incidental  to  the  business  conducted,  and,  therefore,  is  not 


56 


ACCOUNTANCY   AND    BUSINESS    MANAGEMENT 


closed  until  after  the  final  profit  or  loss  has  been  ascertained. 
the  general  ledger  or  in  a  private  ledger. 


It  should  be  kept  in 


96.  The  object  in  keeping  the  capital  account  is  to  show  the  owner's  investment, 
interest,  or  equity  in  the  business.  The  title  of  the  account  is  usually  the  owner's 
name  followed  by  the  word  "Capital." 

The  following  transactions  affecting  F.A.Raymond's  capital  account  are  prop- 
erly recorded  in  the  account  which  appears  below: 

He  began  business  with  a  cash  investment  of  $8,000.00. 
At  the  time  he  began  business  he  owed  on  personal  accounts, 
$140.00. 

He  made  an  additional  cash  investment  of  $5,000.00. 
He  withdrew  in  cash  $1,500.00. 
He  made  an  additional  cash  investment  of  $6,000.00. 
He  paid  a  personal  note  amounting  to  $100.00  out  of  the  cash 
invested,  which  he  considered  as  a  withdrawal  of  invested  capital. 
His  net  loss  for  the  first  ten  months  he  was  in  business  was  $453.00. 
He  withdrew  in  cash  $1,000.00 

His  capital  account  was  charged  for  the  debit  balance  of  his  per- 
sonal account,  representing  charges  for  incidental  personal  expense 
bills  paid  out  of  the  funds  of  the  business  amounting  to  $200.00. 
His  net  profit  for  the  month  of  January  was  $1,202.46. 


Mar. 

1 

Mar. 

1 

May 

1 

Sept. 

1 

Nov. 

1 

Dec. 

1 

Dec. 

31 

Jan. 

12 

Jan 

31 

Jan.    31 


Illustration  27 


■^/C^^^i^t^^,  W/  t^^J^/s  aSr . 


/ 
J/ 

\3/ 


Jb>nS, 


/z 

3  / 

3/ 


/■vo 

/SOO 

/ 00 


fao? 


MA 


?H<2y 


Gc&n* 


&5Jy, 


>*7-^iA^d^yt^i^yt^K' 


?ZiS0*jtH£lU- 


?000 
S0  00 
6,  COO 


/  <?00t? 


/  Z0Z 


'X<7  0  <? 


'tro? 


vt, 


Hja_ 


v£ 


Note:  Mr.  Raymond  ascertained  his  net  capital  as  of  January  31  because  he  entered  into  a  partnership  with 
another  merchant  on  February  1. 


ELEMENTARY  ACCOUNTING  57 


ANALYSIS 


1.  How  much  capital  did  Mr.  Raymond  invest  during  the  first  ten  months  he 

was  in  business?  ■  . 

2.  How  much  did  he  withdraw  from  his  invested  capital  during  that  tune.' 
Z.  Did  the  loss  on  the  business  transacted  during  this  period  increase  or 

decrease  his  capital? 

4.  What  was  his  net  capital  at  the  beginning  of  the  second  year? 

5.  How  much  did  he  increase  or  decrease  it  during  January? 

6.  What  items  entered  into  the  final  adjustment  on  January  31  when  his 
net  capital  was  again  determined?  Did  these  items  increase  or  decrease  his  net 
capital? 

Rules  for  Debiting  and  Crediting  Proprietor's  Capital  Account 


98.    Credit  the  proprietor's  capital 


account  for    his  investments  and   for 
items  which  increase  his  invested  capital. 


97.  Debit  the  proprietor's  capital 
account  for  items  which  decrease  his 
invested  capital. 

99.  The  balance  of  an  owner's  capital  account,  after  the  net  profit  or  the 
net  loss  and  any  other  amounts  affecting  it  have  been  closed  into  it,  shows  the 
owner's  net  capital  or  net  insolvency— (a)  net  capital  when  the  credit  side  is  the 
larger,  and  (b)  net  insolvency  when  the  debit  side  is  the  larger.  The  capital  ac- 
count'should  be  shown  in  a  separate  section  of  the  statement  of  assets  and  liabili- 
ties, which  is  the  last  section  of  that  statement. 

closing  the  capital  account 

100.  The  object  in  closing  the  proprietor's  capital  account  is  to  show  in 
one  amount  the  net  capital  or  net  insolvency  at  the  close  of  a  fiscal  period, 
and  at  the  beginning  of  the  next  period.  After  the  income  and  profit  and  loss 
statement  has  been  prepared,  the  account  is  credited  by  a  journal  entry  for  the 
net  profit  or  debited  for  the  net  loss  shown  by  that  statement.  After  this  entry 
is  posted,  if  the  credit  side  is  the  larger,  the  balance  of  the  account  is  the  net 
capital.  It  is  entered  on  the  debit  side  to  balance  the  account,  which  is  then 
footed  and  ruled,  and  the  net  capital  is  brought  down  to  the  credit  side  under 
date  of  the  next  business  day,  as  shown  in  illustration  27. 

101.  If  the  debit  side  is  the  larger  after  the  net  profit  or  net  loss  is  posted 
to  the  account,  the  balance  shows  the  net  insolvency,  which  should  be  entered  on 
the  credit  side  to  balance  the  account.  The  account  is  then  footed  and  ruled,  and 
the  balance  brought  down  under  date  of  the  next  business  day. 


58  ACCOUNTANCY  AND   BUSINESS  MANAGEMENT 

EXERCISE  13 

Jan.     1  Henry  B.  Walters  invested  $2000.00. 

Feb.  15  He  withdrew  $500.00. 

July     1  He  invested  $1000.00. 

Oct.  22  He  withdrew  $200.00. 

Dec.  10  He  purchased  for  his  business  with  his  private  funds  a  store  building 

and  lot  costing  $6250.00. 

Dec.  31  His  profit  for  the  year,  which  he  left  in  the  business,  was  $1346.12. 

exercise  14 

Jan.     1     Charles  E.  Ford  invested  $3200.00  in  cash,  merchandise   worth 

$900.00,  notes  made  in  his  favor  by  his  debtors  $750.00,  and  accounts 

receivable  from  his  debtors  $500.00. 
Jan.    1     His  liabilities  to  be  paid  upon  their  maturity  out  of  the  cash  capital 

of  his  business  were  accounts  payable  to  his  creditors,  $375.00;  and 

notes  payable,  $800.00. 
Apr.    1     He  invested  $1000.00. 
May  15    He  bought  an  automobile  for  his  personal  use  which  was  paid  for  with 

money  he  withdrew  from  the  business,  $750.00. 
Nov.  20    He  withdrew  $500.00. 
Dec.  31    His  net  loss  for  the  year  was  $275.40. 

Proprietor's  Personal  Account 

102.  The  personal  account  of  an  owner  is  treated  like  any  other  personal 
account.  It  is  kept  under  the  name  of  the  owner  followed  by  the  word  "Personal." 
It  is  opened  for  the  purpose  of  keeping  incidental  items  separate  from  the  more 
permanent  investment  items  entered  in  his  capital  account. 

103.  The  personal  account  of  an  owner  is  debited  for: 

(a)  all  sums  withdrawn  for  private  use  which  are  not  to  be  deducted  from  the 
investment, 

(6)  any  personal  debts  paid  from  the  funds  of  the  business, 

(c)  all  sums  collected  from  customers  and  retained  by  the  owner. 
It  is  credited  for: 

(d)  any  sums  paid  in  subject  to  immediate  withdrawal, 

(e)  any  debts  o!  the  business  paid  from  private  funds  which  are  not  to  apply 
on  the  investment, 

(/)  the  owner's  salary  when  it  is  paid  to  him  in  partial  payments  as  needed, 

(g)  such  part  of  the  net  profit  the  owner  may  direct. 

The  following  bills  for  the  personal  expenses  of  F.  A.  Raymond  were  paid 
out  of  the  funds  of  his  business  and  charged  to  his  personal  account,  which  is 
illustrated  on  the  next  page.  The  balance  of  this  account  was  closed  into  the 
capital  account,  as  shown  in  illustrations  27  and  28. 


ELEMENTARY  ACCOUNTING 


59 


Jan.    5  Paid  gas  bill,  $7.50. 

10  Paid  life  insurance  premiums,  $47.52. 

16  Paid  grocery  bill,  $31.40. 

21  He  withdrew  cash,  $75.00. 

25  Paid  his  house  rent,  $35.00. 

31  Paid  electric  light  bill,  $3.58. 


Illustration  28 


tr-P2 '' /^jf^sy^tsrw^aC?  -T-yy>^c^7^L/^ 


jLrtS. 


7 
*7 

j/ 

7* 


¥6 


IQO 


zjL 


Qams, 


3/  j&zjb^ZizZ'  yes  f 


ZOO 


7  a  o 


104.  The  balance  shows  the  amount  to  be  paid  to  or  by  the  owner,  or  to  be 
closed  into  his  capital  account,  as  a  final  adjustment.  When  the  personal  account 
is  to  be  closed  into  the  capital  account,  it  must  be  done  by  a  separate  journal  entry. 

105.  The  final  disposition  of  the  balance  shown  by  the  owner's  personal 
account  is  determined  entirely  bij  the  wishes  of  the  owner.  If  it  shows  a  debit  balance, 
he  may  pay  into  the  business  out  of  his  personal  funds  the  amount  of  the  balance, 
which  will  close  the  personal  account.  On  the  other  hand,  he  might  prefer  to 
debit  his  capital  account  and  credit  the  personal  account  for  the  balance  of  the 
latter,  which  likewise  would  close  it.  If  his  personal  account  shows  a  credit 
balance,  he  can  draw  it  out  in  cash,  or  close  the  account  by  debiting  it  for  its  balance 
and  crediting  his  capital  account. 

exercise  15 
Record  the  following  items  affecting  the  personal  account  of  John  A.  Butler: 
Dec.    1     Paid  his  house  rent,  $45.00. 

2    He  withdrew  $100.00  to  apply  on  his  salary. 
5    Paid  provision  bill,  $35.20. 
8    Paid  auto  license,  $12.50. 

10    He  collected  $22.50  from  a  customer  and  kept  the  money. 
15    He  made  a  temporary  loan  to  the  business  of  $175.00  to  pay  a  note 

maturing  today. 
22    He  withdrew  $150.00  to  apply  on  his  salary. 


60  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

Dec.  28    He  paid  an  account  of  the  business  from  his  private  funds,  $32.75. 
31     His  account  is  to  be  credited  for  his  monthly  salary,  $250.00. 
31     His  personal  account  is  to  be  credited  for  his  net  profit,  $928.16. 
31    The  balance  of  his  personal  account  is  to  be  closed  into  his  capital 
account. 

NOTES  AND  DRAFTS 

Notes 

106.  A  promissory  note  is  an  unconditional  written  promise  to  pay  a  specified 
sum  of  money  at  a  definite  future  time.  It  is  a  medium  of  exchange.  There  are 
two  principal  original  parties  to  a  note,  the  maker  and  the  payee.  The  maker  is  the 
party  who  signs  the  note — who  makes  the  promise  to  pay.  The  payee  is  the 
party  in  whose  favor  the  note  is  made — the  one  to  whom  the  amount  is  to  be  paid. 

Illustration  29 


^U€/??^-ir  2%    /f 


107.  In  illustration  29  William  B.  Allison  is  the  maker  and  Gordon  Southard 
&  Co.  is  the  payee.  The  maker  of  a  note  usually  owes  or  is  in  debt  to  the  payee 
of  the  note,  i.e.,  the  maker  is  a  debtor  of  the  payee. 

Drafts 

108.  A  draft  is  a  written  request  to  pay  a  specified  sum  of  money  at  a  certain 
future  time.  It  is  a  medium  of  exchange.  There  are  three  parties  to  a  draft,  the 
drawer,  the  drawee,  and  the  payee.  The  drawer  is  the  party  who  makes  the  request. 
The  drawee  is  the  party  upon  whom  the  request  is  made  and  who,  if  he  accepts  the 


ELEMENTARY   ACCOUNTING 


61 


request,  becomes  the  payer  or  "acceptor"  of  the  draft.  The  payee  is  the  party  in 
whose  favor  the  draft  is  drawn,  the  one  to  whom  the  amount  of  the  draft  is  to  be 
paid  when  due. 


Illustration  30 


'£S?WJt&&,      '<%} 


109.  In  illustration  30  Cornell  Brothers  is  the  drawer,  Winters,  Van  Fleet  & 
Company  is  the  drawee  and  acceptor,  and  Frank  B.  Cunningham  is  the  payee. 
The  drawee  of  a  draft  usually  owes  or  is  in  debt  to  the  drawer;  i.e.,  the  drawee  is  a 
debtor  of  the  drawer.     The  payee  is  usually  a  creditor  of  the  drawer. 

110.  When  the  drawer  makes  a  draft  payable  to  a  third  party  it  is  generally 
spoken  of  as  a  "three  party"  draft,  and  in  such  case  it  may  be  assumed  that  the 
drawer  owes  the  payee. 

111.  When  the  drawer  and  the  payee  is  the  same  person,  the  draft  is  usually 
drawn  for  the  purpose  of  collecting  a  debt.  If  the  draft  is  drawn  in  favor  of  the 
payee's  bank  the  same  purpose  is  indicated. 

112.  Drafts  are  of  two  kinds  as  to  time  of  payment.  Those  payable  "at 
sight"  are  known  as  sight  drafts  and  are  usually  payable  on  presentation.  Those 
payable  "after  sight"  or  "after  date"  are  known  as  time  drafts.  After  a  time  draft 
has  been  accepted,  it  is  known  as  an  acceptance. 

113.  Accepting  a  draft  is  agreeing  to  pay  it  when  it  is  due  by  writing  the 
word  "Accepted"  across  the  face,  followed  by  the  date  and  the  name  of  the  drawee, 
who  thus  becomes  the  "acceptor,"  and  the  draft  is  known  thereafter  as  an  "accept- 
ance," as  stated  in  the  preceding  paragraph.     (See  illustration  30.) 

114.  The  date  of  maturity  is  the  date  on  which  the  note  or  draft  falls  due. 
When  the  time  is  indicated  in  days,  the  exact  number  of  days  is  meant,  not  counting 
the  date  of  making  or  of  acceptance,  but  counting  the  date  of  maturity.  When 
the  time  is  indicated  in  months,  the  same  day  of  the  maturing  month  is  the  date  of 
maturity.     Drafts  and  notes  are  called  negotiable  instruments. 


62  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

115.  A  draft  drawn  "after  sight"  begins  to  mature  from  the  date  of  the  accept- 
ance, and  when  drawn  "after  date"  it  begins  to  mature  from  the  date  the  draft 
was  drawn  without  regard  to  the  date  of  acceptance.  A  note  begins  to  mature 
from  the  date  it  is  made. 

116.  Due  on  Sunday  or  a  legal  holiday.  The  law  in  nearly  all  states  is  that 
when  the  due  date  falls  on  Sunday  or  a  legal  holiday,  the  paper  falls  due  on  the 
next  following  business  day.  In  a  very  few  states  it  is  due  on  the  last  preceding 
business  day.  Days  of  grace  are  three  days  formerly  allowed  in  addition  to  the 
time  specified  for  the  payment  of  commercial  paper.  They  have  been  abolished  in 
all  but  a  few  states,  and  will  doubtless  be  abolished  in  all  states  within  a  short  time. 

117.  Negotiable  notes  and  drafts  are  those  which  can  be  transferred  by  one 
party  to  another.  To  be  negotiable,  a  commercial  paper  must  contain  the  words 
"or  order"  or  "or  bearer."  When  it  does  not  contain  these  words  it  is  said  to  be 
non-negotiable,  which  means  that  it  cannot  be  transferred  by  simple  endorsement 
and  delivery.  In  most  states  special  statutes  provide  that  such  papers  can  be 
transferred  by  assignment,  though  the  party  to  whom  it  is  transferred  gets  no 
better  title  to  the  paper  than  the  original  holder  had. 

118.  Transfer.  When  a  payee  transfers  a  negotiable  note  or  acceptance, 
he  does  so  by  writing  his  name  across  the  back,  and  then  delivers  the  paper  to 
the  endorsee.  This  is  known  as  an  endorsement.  When  a  note  is  transferred,  the 
payee  becomes  the  first  endorser;  when  an  acceptance  is  transferred,  he  becomes  the 
second  endorser,  unless  the  draft  is  drawn  by  him  in  his  own  favor,  in  which  case 
he  is  the  first  endorser.  When  commercial  paper  is  made  payable  "to  bearer" 
it  is  not  necessary  for  the  holder  to  endorse  it  when  transferring  it  to  another,  but 
for  prudential  reasons  it  is  generally  requested  and  usually  required.  The  differ- 
ent forms  of  endorsement  are  shown  on  the  next  page.  These  endorsements  apply 
not  only  to  notes  and  drafts  but  to  checks  and  all  forms  of  negotiable  paper. 

NOTES  RECEIVABLE  AND  NOTES  PAYABLE 

119.  Notes  receivable  are  the  written  promises  of  others  to  pay  which  are 
received  by  us.  They  consist  of  notes  and  accepted  drafts  the  value  of  which  we 
are  to  receive  when  they  are  due. 

120.  Notes  payable  are  our  own  written  promises  to  pay  given  (issued)  to 
others.  They,  consist  of  notes  and  accepted  drafts  the  value  of  which  we  are  to 
pay  wrhen  they  are  due. 

121.  Both  show  a  condition  of  indebtedness,  notes  receivable  corresponding 
with  accounts  receivable  and  notes  payable  corresponding  with  accounts  payable. 
The  principal  difference  between  a  note  receivable  or  a  note  payable  and  an  account 
receivable  or  account  payable  is  that  the  note  is  a  written  promise  to  pay,  and  the 
account  indicates  an  oral  or  implied  promise  to  pay. 


ELEMENTARY   ACCOUNTING 


63 


ENDORSEMENTS 

(In  Blank) 
J.  A.  Amsbaugh  &  Co. 

(For  Collection) 
Pay  Tenth    National   Bank   for 
collection. 

J.  A.  Amsbaugh  &   Co. 

(In  Full  or  Special) 
Pay  to  the  order  of  W.  E.  West. 
/.  A.  Amsbaugh  &   Co. 

(Endorsement  with  Guarantee) 
We  hereby  guarantee    the   pay- 
ment of  the  within  note. 

J.  A.  Amsbaugh  &   Co. 

(Without  Recourse)* 
Pay  to  the  order  of  W.  E.  West 
without  recourse. 

J.  A.  Amsbaugh  &   Co. 

(For  Part  Payment) 
$50.00. 

July  5,  19     ,    Received   on    the 
within  note  Fifty  Dollars.f 

(Restricted) 
Pay  to  W.  E.  West  only. 
J.  A.  Amsbaugh  &   Co. 

*  This  means  that  the  party  so  endorsing  is  relieved  from   any  further  clajm 
or  liability  as  endorser. 

t  The  writing  of  the  name  of  the  holder  on  the  back  of  a  note  is  a  receipt  in 
full  in  the  hands  of  the  maker,  therefore  it  should  always  be  omitted  in  endorsing 
for  partial  payments. 

122.  Notes  and  acceptances  are  generally  received  and  issued  in  settlement 
of  personal  accounts,  thus  changing  oral  promises  into  written  promises,  which  are 
in  fact  written  contracts. 

Note:  If  A  owes  B  on  account  and  afterwards  A  gives  B  his  note  or  acceptance  in 
settlement,  while  the  record  of  A's  indebtedness  in  B's  books  is  transferred  from  A's  personal 
account  to  the  notes  receivable  account,  A's  indebtedness  to  B  remains  just  the  same. 
In  some  states  and  under  some  circumstances  the  written  promise  (note  or  acceptance) 
may  be  more  binding  upon  A. 

123.  The  principal  advantage  of  notes  and  acceptances  is  that  they  are 
negotiable,  that  is,  they  are  transferable  from  one  person  to  another,  which  lends  to 
them  the  characteristics  of  mediums  of  exchange  and  greatly  increases  their  useful- 
ness in  the  transaction  of  business. 

124.  Because  of  their  negotiability,  notes  and  acceptances  are  frequently 
bought  and  sold,  are  discounted  at  bank  to  raise  funds,  are  transferred  "on  account," 
and  are  sometimes  given  as  security  for  loans  or  debts. 


64  accountancy  and  business  management 

Notes  Receivable  Account 

125.  Notes  receivable  account  is  one  of  the  class  in  which  items  relating  to 
mediums  of  exchange  are  recorded.    The  object  in  keeping  the  account  is  to  show: 

(a)  The  face  value  of  notes  and  acceptances  received  from  debtors, 

(b)  The  face  value  of  such  notes  and  acceptances  which  have  been  paid  by 
their  makers,  or  transferred  by  us  before  maturity  to  others  to  apply  on 
debts  owed  to  them,  and 

(c)  The  face  value  of  notes  and  acceptances  receivable  on  hand  at  any  date, 
which  is  a  current  asset. 

126.  Notes  and  acceptances  receivable  are  considered  to  be  "on  hand" 
until  actual  payment  of  them  has  been  received,  even  though  some  of  them  may 
have  been  sent  to  banks  or  placed  in  attorneys'  hands  for  collection. 

127.  All  items  must  first  appear  on  the  debit  side  of  this  account  before  they 
can  appear  on  the  credit  side.  As  notes  and  acceptances  of  others  are  received  they 
are  entered  on  the  debit  side  of  the  notes  receivable  account  at  their  face  value. 
As  they  are  paid  and  returned  to  those  who  issued  them,  or  are  transferred  to  others, 
they  are  entered  as  canceling  items  on  the  credit  side  at  their  face  value. 

128.  When  a  debtor  issues  to  his  creditor  a  note  or  acceptance  covering  a 
debt  already  recorded  in  their  respective  personal  accounts,  the  creditor  debits 
notes  receivable  account  and  credits  his  debtor's  personal  account  for  the  face 
value  of  the  paper.  The  debtor's  record  of  the  transaction  is  a  debit  to  his  creditor's 
personal  account  and  a  credit  to  notes  payable  account.  Regardless  of  these 
bookkeeping  entries,  however,  the  debtor  still  continues  to  owe  his  debt  until  the 
note  or  acceptance  is  paid.  He  has  simply  changed  an  implied  or  oral  promise 
to  pay  into  a  written  promise  to  pay.  Accordingly,  the  bookkeeping  entries  referred 
to  merely  transfer  the  record  of  the  indebtedness  from  the  debtor's  personal  account 
to  the  notes  receivable  account  on  the  books  of  the  creditor,  and  from  the  creditor's 
personal  account  to  the  notes  payable  account  on  the  books  of  the  debtor. 

129.  The  giving  of  a  written  promise  to  pay,  whether  in  the  form  of  a  note 
or  acceptance,  therefore  does  not  pay  the  debt.  In  case  a  note  or  draft  is  not  paid 
at  maturity  (when  it  ceases  to  be  negotiable),  it  is  the  best  accounting  practice  to 
charge  it  back  to  the  debtor's  personal  account.  In  such  case,  the  note  or  accept- 
ance becomes  merely  a  written  evidence  of  indebtedness  over  the  signature  of  the 
debtor.  The  debtor  continues  to  be  responsible  for  his  debt  until  the  note  is 
redeemed  or  the  personal  account  is  paid.  For  these  reasons  many  concerns  do  not 
credit  debtors'  accounts  for  notes  and  acceptances  received,  but  instead  make  a 
memorandum  record  of  them  in  a  notes  receivable  book.  The  debit  items  in  the 
personal  accounts  of  the  debtors  are  not  canceled  until  the  notes  or  acceptances 
are  paid.    Notes  and  acceptances  issued,  however,  should  invariably  be  credited  to 


ELEMENTARY  ACCOUNTING 


65 


the  notes  payable  account  and  charged  to  the  personal  accounts  of  the  parties  to 
whom  they  were  issued. 

The  following  transactions  are  correctly  recorded  in  the  notes  receivable 
account  shown  below: 

Jan.    1     Received  note  for  $500.00. 
4    Received  note  for  $450.00. 
6    Received  accepted  draft  for  $375.00. 
15     Received  cash  for  note  entered  on  January  1. 
15    Received  note  for  $220.10. 
17    Received  acceptance  for  $360.75. 
19    Received  accepted  draft  for  $900.00. 
21     Received  cash  for  draft  entered  on  January  6. 

23  Received  note  for  $102.14. 

24  Received  cash  for  draft  entered  on  January  4. 

25  Transferred  note  entered  on  January  17  to  a  creditor  in  part  pay- 
ment of  his  account. 

26  Received  check  for  draft  entered  on  January  19. 

31     Received  $200.00  in  part  payment  of  note  entered  on  January  15. 


Illustration  31 


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ANALYSIS 

1.  On  which  side  of  this  account  are  entered  the  amounts  of  the  notes  and 
accepted  drafts  received? 

2.  What  do  the  amounts  on  the  other  side  of  the  account  show? 

3.  On  what  dates  was  it  possible  to  rule  out  balancing  items? 

4.  What  do  the  footings  on  the  debit  and  credit  sides  show? 

5.  What  is  the  balance  of  the  account  and  what  does  it  show? 

6.  Which  are  the  balancing  items  below  the  rulings? 

7.  How  may  the  balance  of  the  account  be  proved? 


66  accountancy  and  business  management 

Rules  for  Debiting  and  Crediting  Notes  Receivable  Account 


130.     Debit  for  the  face  value  of 
others'  notes  and  acceptances  received. 


131.  Credit  for  the  face  value  of 
such  notes  and  acceptances  when  paid 
or  transferred. 

132.  The  balance  of  the  notes  receivable  account  (if  any)  shows  the  amount 
of  notes  and  acceptances  receivable  on  hand,  which  is  a  current  asset  that  should 
be  included  in  the  statement  of  assets  and  liabilities.  The  sum  of  the  unpaid 
notes  and  acceptances  on  hand  must  agree  with  the  balance  of  the  account. 

133.  When  all  items  balance  above  a  given  point  they  may  be  ruled  out, 
as  shown  in  illustration  31,  but  the  notes  receivable  account  should  never  be  closed 
except  when  it  is  necessary  to  forward  the  account  to  another  page.  In  this  case 
the  balance  is  entered  on  the  credit  side,  the  account  is  footed  and  ruled,  and  the 
balance  is  forwarded  to  a  new  account  on  another  page. 

exercise  16 

George  Warren's  notes  receivable  transactions  are  the  following.  Enter 
them  in  a  notes  receivable  account. 

Feb.    2  Received  30  day  note  for  $250.00. 

5  Received  60  day  note  for  $112.50. 

25  Received  10  day  acceptance  from  customer  for  $96.50. 

Mar.    3  Received  cash  in  payment  of  note  entered  on  Feb.  2. 

4  Received  two  months  note  for  $165.70. 

7  Received  cash  in  payment  of  acceptance  entered  on  Feb.  25. 

10  Received  30  day  note  for  $282.19. 

12    Received  three  months  note  for  $742.56. 
Apr.    4    Received  cash  for  note  entered  on  Feb.  5. 

9     Transferred  note  entered  on  March  10  to  a  creditor  in  part  pay- 
ment of  his  account. 

exercise  17 

Enter  the  following  notes  receivable  transactions  of  Blake  and  Ray  in  a  notes 
receivable  account. 

May   2    Received  15  day  accepted  draft  from  customer  for  $92.68. 
4    Received  90  day  note  for  $322. 18. 

11  Received  60  day  accepted  draft  from  customer  for  $216.22. 

15  Had  note  entered  on  May  4  discounted  at  bank. 

16  Received  one  month  note  for  $112.70. 

17  Received  cash  for  acceptance  entered  on  May  2. 
June  12  Received  30  day  note  for  $175.90. 

15  Had  acceptance  entered  on  May  11  discounted  at  bank. 

16  Received  cash  for  note  entered  on  May  16. 


ELEMENTARY  ACCOUNTING 


67 


July    2    Received  60  day  note  for  $300.00. 

12    Transferred  note  entered  on  June  12  to  a  creditor  to  apply  on  account. 
28    Received  accepted  draft  drawn  at  10  days  sight  for  §211.18. 


NOTES  PAYABLE  ACCOUNT 

134.  Notes  payable  account  is  one  of  the  class  in  which  items  relating  to 
mediums  of  exchange  are  recorded.     The  object  in  keeping  this  account  is  to  show: 

(a)  the  face  value  of  our  notes  and  acceptances  issued  to  creditors, 

(6)  the  face  value  of  these  notes  and  acceptances  which  have  been  redeemed 

by  and  returned  to  us,  and 

(c)  the  face  value  we  still  owe  on  unpaid  notes  and  acceptances  at  any  date, 

which  is  a  current  liability. 

135.  All  items  must  first  appear  on  the  credit  side  of  this  account  before 
they  can  appear  on  the  debit  side,  because  our  obligations  to  pay  must  be  issued 
before  they  can  be  paid  and  redeemed.  As  we  pay  them  and  they  are  returned  to  us 
by  those  to  whom  they  were  issued  or  transferred,  they  are  entered  as  canceling 
items  on  the  debit  side  of  the  account. 

The  following  transactions  are  correctly  recorded  in  the  notes  payable  account 
shown  below: 

Jan.    1  Gave  note  for  $200.00. 

4  Gave  note  for  $633.45. 

9  Accepted  draft  for  $89.73. 

16  Gave  note  for  $1,137.68. 

19  Paid  draft  entered  on  January  9. 

21  Accepted  draft  for  $113.39. 

24  Paid  note  entered  on  January  4. 

24  Issued  note  for  $150.00. 

26  Paid  note  issued  January  1. 

30  Accepted  draft  for  $212.32. 

31  Paid  draft  entered  on  January  21. 


Illustration  32 


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ACCOUNTANCY    AND    BUSINESS   MANAGEMENT 


ANALYSIS 

1.  On  which  side  of  this  account  are  entered  the  amounts  of  notes  and 
accepted  drafts  issued? 

2.  What  do  the  amounts  on  the  other  side  of  the  account  show? 

3.  On  what  date  was  the  account  in  balance? 

4.  What  do  the  footings  of  the  account  show? 

5.  What  is  the  balance  of  the  account  and  what  does  it  show? 

6.  Which  are  the  balancing  items  below  the  rulings? 

7.  How  may  the  balance  of  the  account  be  proved? 

8.  At  what  value  are  notes  receivable  and  notes  payable  accounts  always 
debited  and  credited? 

Rules  for  Debiting  and  Crediting  Notes  Payable  Account 


136.     Debit  for  the  face  value  of 
our  notes  and  acceptances  when  paid. 


137.  Credit  for  the  face  value  of 
our  notes  and  acceptances  issued  to 
others. 


138.  The  balance  of  the  notes  payable  account  (if  any)  shows  the  amount 
of  our  notes  and  acceptances  unpaid,  which  is  a  current  liability  that  should  be 
included  in  the  statement  of  assets  and  liabilities.  The  sum  of  the  unpaid  notes 
and  acceptances  must  equal  the  balance  of  the  account. 

139.  When  all  items  balance  above  a  given  point  they  may  be  ruled  out, 
as  shown  in  illustration  32,  but  the  notes  payable  account  should  never  be  closed 
except  when  it  is  necessary  to  forward  the  account  to  another  page.  In  this  case 
the  balance  is  entered  on  the  debit  side,  the  account  is  footed  and  ruled,  and  the 
balance  is  forwarded  to  the  credit  side  of  a  new  account  on  another  page. 


exercise  18 

J.  C.  Bond's  notes  payable  transactions  are  as  follows, 
notes  payable  account. 


Enter  them  in  a 


Feb.    3  Gave  30  day  note  for  $100.00. 

5  Gave  60  day  note  for  $242.50. 

24  Accepted  10  day  draft  drawn  on  him  bjr  creditor  for  $52.60. 

Mar.    1  Paid  cash  in  settlement  of  note  entered  on  Feb.  3. 

3  Gave  30  day  note  for  $133.90. 

6  Paid  cash  in  settlement  of  draft  entered  on  Feb.  24. 
13  Gave  two  months  note  for  $211.40. 

22  Gave  30  day  note  for  $175.00. 

Apr.    2  Paid  cash  in  settlement  of  note  entered  on  Mar.  3. 

6  Paid  cash  in  settlement  of  note  entered  on  Feb.  5. 


ELEMENTARY  ACCOUNTING  69 

EXERCISE  19 

Enter  the  following  notes  payable  transactions  of  Brown  and  King  in  a  notes 
payable  account: 

May    1  Gave  3  months  note  for  $185.40. 

4  Accepted  10  day  draft  drawn  on  them  by  creditor  for  $125.00. 

7  Gave  30  day  note  for  $278.21 . 

13  Paid  cash  in  settlement  of  draft  entered  on  May  4. 

14  Gave  60  day  note  for  $137.50. 
21  Gave  30  day  note  for  $225.00. 

June   6    Paid  cash  in  settlement  of  note  entered  on  May  7. 

15  Gave  2  months  note  for  $100.00. 

20  Paid  cash  in  settlement  of  note  entered  on  May  21. 

25  Gave  60  day  note  for  $372.60. 

July    2  Gave  30  day  note  for  $165.72. 

13  Paid  cash  in  settlement  of  note  entered  on  May  14. 

CASH  ACCOUNT 

140.  Cash  includes  gold,  silver,  coins,  bank  notes,  U.  S.  Treasury  notes, 
money  orders,  bank  drafts,  checks,  and  whatever  else  is  received  or  given  as  money. 
Cash  is  the  most  important  of  the  mediums  of  exchange.  The  objects  in  keeping 
the  cash  account  are  to  record  the  receipts  and  -payments  of  cash,  and  to  ascertain 
the  amount  of  cash  that  should  be  on  hand. 

141.  The  cash  on  hand  includes  the  money  in  the  cash  register,  safe,  or 
drawer,  to  which  must  be  added  the  balance  in  bank  shown  by  the  check  book. 
When  money  is  kept  on  deposit  in  more  than  one  bank,  the  sum  of  the  balances 
must  be  added  to  the  cash  in  the  register,  safe  or  drawer.  When  a  separate  ledger 
account  is  kept  with  the  bank,  "cash  on  hand"  includes  only  the  actual  cash  in 
the  safe  or  drawer.    Ledger  accounts  with  banks  are  seldom  kept. 

142.  The  cash  account  is  frequently  not  kept  in  the  ledger  because  the 
cash  book,  in  which  the  entries  for  all  receipts  and  payments  of  cash  are  made, 
is  really  the  cash  account.  When  the  cash  book  is  kept,  no  cash  items  are 
entered  in  any  other  book. 

143.  Cash  receipts  are  entered  on  the  left-hand  or  debit  side  of  the  cash 
book.  Entries  for  cash  receipts  result  in  debits  to  cash  account,  and  credits  to  the 
accounts  named,  when  the  items  of  cash  received  are  posted.  Cash  payments  are 
entered  on  the  right-hand  or  credit  side.  Entries  for  cash  payments  result  in 
credits  to  cash  account,  and  debits  to  the  accounts  named,  when  the  items  of  cash  paid 
are  posted. 

The  cash  receipts  and  payments  of  W.  B.  Ward  for  the  month  of  January, 
listed  on  page  70  are  recorded  in  the  cash  book  shown  in  illustration  33. 


70 


ACCOUNTANCY  AND  BUSINESS  MANAGEMENT 


Illustration  33 


Cash  Receipts 


Jan. 

1 
1 

11 
15 
18 
31 

1 

Balance 

W.  B.  Ward,  Capital  a/c 

Walter  Crane 

Notes  Receivable 

W.  B.  Ward,  Pers.  a/c 

Total  Receipts 

Balance 

Additional  cash  investment 
Bill  Dec.  3 

F.  C.  Boyd's  note  due  today 
Received  for  debt  due  him 

1500 

78 

328 

10 

00 
22 
55 
00 

129 
1916 

85 

77 

2046 
964 

62 

Feb. 

46~ 

Jan.    1    Balance  on  hand  $129.85. 

1  Mr.  Ward  made  an  additional  cash  investment  of  $1,500.00,  to  be 
credited  to  his  capital  account. 

2  Paid  Jameson  &  Fox  for  bill  December  5,  $218.78. 

3  Paid  rent  for  store  for  January,  $50.00.     This  is  an  expense  item  to 
be  debited  to  expense  account. 

8    Paid  Bowen  &  Co.  to  apply  on  bill  December  27,  $275.00. 
11     Received  from  Walter  Crane  for  bill  December  3,  $78.22. 
11     Paid  a  doctor  bill  of  $20.00  for  Mr.  Ward,  to  be  charged  to  his 

personal  account. 
15    Paid  travelling  expenses  of  Mr.  Ward  for  a  business  trip  out  of  the 

city,  which  is  an  expense  item,  $11.60. 
15    F.  C.  Boyd  paid  his  note  for  $328.55  in  favor  of  Mr.  Ward  which 

is  due  today.     As  the  notes  receivable  account  was  debited  when 

the  note  was  received,  credit  it  when  the  note  is  paid. 

17  Paid  note  for  $228.50  in  favor  of  Biggs  &  Co.,  which  is  due  today. 
As  the  notes  payable  account  was  credited  when  the  note  was 
issued,  it  is  debited  when  the  note  is  paid. 

18  Mr.  Ward  collected  a  personal  debt  due  him  of  $10.00,  and  turned 
the  money  over  to  the  business.  It  is  to  be  credited  to  his  personal 
account. 

22    Paid  Bowen  &  Co.  in  full  for  bill  December  27,  $269.60. 
28    Paid  gas  and  light  bill,  $8.68.    This  is  an  expense  item. 

ANALYSIS 

1.    What  was  the  cash  balance  on  January  1? 


ELEMENTARY  ACCOUNTING 


71 


Illustration  33 


Cash  Payments 

Jan. 

2 

Jameson  &  Fox 

Bill  Dec.  5 

218 

78 

3 

Expense 

Rent  of  store  for  Jan. 

50 

00 

8 

Bowen  &  Co. 

a/c  bill  Dec.  27 

275 

00 

11 

W.  B.  Ward,  Pers."  a/c 

Personal  doctor's  bill 

20 

00 

15 

Expense 

Traveling  expenses 

11 

60 

17 

Notes  Payable 

Note  Biggs  &  Co.  due  today 

228 

50 

22 

Bowen  &  Co. 

In  full  bill  Dec.  27 

269 

60 

28 

Expense 

Gas  and  light  bill 

8 

68 

31 

Total  payments 

1082 

16 

31 

Balance 

964 

46 

2046 

62 

2.  What  were  the  total  receipts  for  the  month? 

3.  Now  much  cash  would  have  been  on  hand  January  31  if  none  had  been 
paid  out? 

4.  What  were  the  total  payments  for  the  month? 

5.  What  were  the  total  debits  and  credits  to  cash  for  the  month? 

6.  To  which  side  of  the  ledger  accounts  named  are  cash  receipts  posted? 
Cash  payments? 

The  following  account  shows  how  the  total  receipts  and  total  payments  are 
posted  from  the  cash  book  to  the  cash  account  in  the  ledger: 

Cash 


Jan. 


Balance 
Total  receipts 


129 

85 

Jan. 

31 

1916 

77 

Total  payments 
Rules  for  Debiting  and  Crediting  Cash  Account 


1082 


1(1 


144. 

receipts. 


Debit     cash     account     for 


145. 

mentrf. 


Credit  cash  account  for  pay- 


146.  The  balance  of  the  cash  account  should  always  be  a  debit  balance, 
and  should  equal  the  amount  of  cash  on  hand.  It  is  a  current  asset  that  should  be 
included  in  the  statement  of  assets  and  liabilities.  The  credit  side  of  the  ac- 
count can  never  properly  be  the  larger  since  it  is  impossible  to  pay  out  more 
cash  than  is  received.  "Overchecking"  on  the  bank  may  result  in  the  credit 
side  being  the  larger,  but  this  is  a  Violation  of  banking  rules,  and  the  cash  book 
should  never  be  closed  showing  an  overdraft. 


72  ACCOUNTANCY  AND   BUSINESS   MANAGEMENT 

147.  To  close.  Find  the  balance  and  entar  it  on  the  credit  side.  Then  foot 
and  rule  the  book,  and  bring  down  the  balance  on  the  opposite  side  under  the  date 
of  the  next  business  day,  as  shown  in  illustration  33. 

exercise  20 

Record  the  following  receipts  and  payments  pf  J.  H.  Bond  in  a  cash  book. 
Then  balance  the  cash  book  in  the  manner  shown  in  illustration  33. 
Jan.    2    Balance  on  hand,  $211.36. 

2  Mr.  Bond  made  an  additional  cash  investment  of  $2000.00  to  be 
credited  to  his  capital  account. 

3  Paid  R.  J.  Maclean  &  Co.  for  bill  December  28,  $179.20. 

4  Paid  H.  B.  Wilson  &  Co.  for  bill  December  29,  $139.85. 

5  Paid  personal  coal  bill  for  Mr.  Bond,  which  is  to  be  charged  to  his 
personal  account,  $36.00. 

6  Paid  rent  for  store  for  January,  $47.50. 

8    Received  from  Charles  Clyde  for  bill  January  2,  $78.52. 
11     Paid  Archer  &  Crane,  on  account  bill  January  6,  $150.00. 
15    Received  from  J.  C.  Lane  for  bill- January  6,  $22.13. 

17  Paid  bill  for  office  supplies,  $18.25. 

18  A.  H.  Morton  paid  his  note  for  $135.42  in  favor  of  Mr.  Bond,  which 
is*  due  today. 

•  20    Paid  Mr.  Bond  $75.00  to  apply  on  his  January  salary,  which  is  to  be 

charged  to  his  personal  account. 
20     Received  from  Allen  &  Blake,  on  account  bill  January  4,  $100.00. 
22    Paid  note  for  $275.80  in  favor  of  H.  B.  Wilson  &  Co.,  which  is  due 

today. 
24     Mr.  Bond  sold  some  second-hand  furniture  belonging  to  him  for 

$20.00  and  turned  the  money  over  to  the  business,  to  be  credited 

to  his  personal  account. 
24    Paid  Archer  &  Crane  in  full  for  bill  January  6,  $95.60. 

26  Paid  note  for  $125.00  in  favor  of  J.  K.  Gill,  which  is  due  today. 

27  Cole  &  Co.  paid  their  note  for  $187.50  in  favor  of  Mr.  Bond,  which 
is  due  today. 

30  Received  from  Allen  &  Blake  in  full  for  bill  January  4,  $72.16. 

31  Paid  clerk's  wages  for  the  month,  $60.00. 

MERCHANDISE  ACCOUNTS 

148.  Merchandise  is  the  general  name  given  to  commodities  that  are  bought 
for  the  purpose  of  selling  them  at  a  profit. 


ELEMENTARY  ACCOUNTING  73 

149.  As  the  principal  profit  of  a  mercantile  or  trading  business  is  derived 
from  the  buying  and  selling  of  merchandise,  those  accounts  in  which  are  recorded 
the  various  items  entering  into  the  cost  of  the  goods  purchased,  the  cost  of  goods 
sold,  and  the  income  from  sales  are  of  first  importance,  because  they  provide  the 
data  from  which  the  gross  trading  profit  is  determined. 

150.  The  three  principal  operations  in  a  trading  business  are  purchasing 
merchandise,  selling  merchandise,  which  are  more  or  less  continuous  operations, 
and  taking  the  inventory  at  the  time  of  closing  the  books,  which  operation  occurs 
at  the  close  of  each  fiscal  period. 

Note:  A  fiscal  period  is  any  yearly  period,  and  may  be  the  calendar  year  or  any  other 
period  of  twelve  months.  For  purposes  of  instruction  in  this  text  a  fiscal  period  is  usually 
assumed  to  be  one  month. 

151.  Three  principal  trading  accounts  are  kept  to  record  the  results  of  the 
three  trading  operations  referred  to  in  the  preceding  paragraph,  namely  the  pur- 
chases, sales,  and  inventory  accounts.  Current  purchases  and  sales  are  recorded  in. 
the  first  two  accounts,  and  they  are  therefore  running  or  continuing  accounts.  The 
inventory  account  receives  entries  only  when  the  books  are  closed  at  the  end  of  a 
fiscal  period  and  when  they  are  opened  at  the  beginning  of  the  next  period.  The 
items  included  in  these  accounts  relate  only  to  the  commodities  dealt  in. 

PURCHASES  ACCOUNT 

152.  The  object  in  keeping  the  purchases  account  is  twofold: 

(a)  To  ascertain  the  invoice  cost  of  merchandise  for  a  fiscal  period,  and 

(b)  To  ascertain  the  invoice  cost  of  goods  sold  for  a  fiscal  period. 

153.  The  invoice  cost  of  goods  purchased  is  debited  to  the  purchases  account. 
Invoice  cost  is  the  price  at  which  goods  are  billed  when  purchased.  All  items  which 
decrease  or  reduce  the  invoice  cost  of  purchases  are  credited  to  the  purchases  account. 
Such  items  are  designated  as  "deductions  from  cost,"  and  consist  of  purchases 
returned  for  credit,  rebates  and  allowances  on  purchases  for  defective  or  damaged 
goods  and  overcharges,  and  similar  items. 

154.  In  order  to  have  the  purchases  account  show  the  invoice  cost  of  goods 
sold  for  a  fiscal  period,  it  must  include  the  inventory  at  the  beginning  and  the 
inventory  at  ihe  close  of  the  current  period.  The  inventory  at  the  beginning  of  the 
period  consists  of  goods  which  were  purchased  but  not  sold  in  the  preceding  fiscal 
period  or  periods.  Since  these  goods  are  on  hand  and  available  for  sale  at  the 
beginning  of  the  current  period,  at  that  time  their  invoice  cost  is  debited  to  the 
purchases  account.  The  inventory  at  the  chse  of  the  current  period  consists  of 
the  unsold  goods  on  hand.  Their  invoice  cost  is  therefore  credited  to  the  purchases 
account  at  the  close  of  the  period  because  it  is  not  a  part  of  the  cost  of  the  goods  sold 
or  disposed  of  during  the  current  period. 

155.  When  the  purchases  account  is  debited  for  the  beginning  inventory 


74 


ACCOUNTANCY   AND   BUSINESS   MANAGEMENT 


and  goods  purchased,  the  debit  footing  is  the  total  invoice  cost  of  merchandise  for 
the  period.  The  total  invoice  cost  minus  the  sum  of  the  deductions  from  invoice 
cost  credited  to  the  account  is  the  net  invoice  cost  of  merchandise.  When  the 
account  is  credited  for  both  deductions  from  invoice  cost  and  the  closing  inventory, 
the  balance  is  the  net  invoice  cost  of  goods  sold  for  the  period. 

The  following  transactions  are  properly  recorded  in  the  purchases  account 
which  appears  below: 

Nov.  1     Inventory  at  beginning  of  period,  $6842.19. 

10    Returned  for  credit  goods  which  were  ordered  by  mistake,  $33.66. 

12    Bought  merchandise  for  cash,  $22.95. 

14    Received  a  rebate  on  goods  purchased  which  were  damaged  because 

of  defective  packing,  $9.45. 
17    Received  rebate  for  overcharge  on  goods  purchased,  $13.72. 

26  Purchased  goods  for  cash,  $15.00. 

27  Returned  defective  goods  for  credit,  $11.16. 

30    Total  purchases  on  account  per  purchases  book  total,  $7002.91. 
30    Inventory  of  unsold  goods  on  hand,  $8716.42. 


Illustration  34 


/^f^^s-r^fr^GLsdwsLS 


9zJU 


/ 

/:- 
Z(. 


2-2 
AT 

•  Jool 

/  3  r-t-j 


/jrrj 


oo 


2JZ. 


'fccrvr' 


/o 

'7 

3o 
30 


33 

9 

/3 
// 


/  ?  jrr.i  o.iz. 


u 

7*- 
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ANALYSIS 

1.  If  no  merchandise  had  been  purchased  during  the  month,  what  would 
have  been  the  invoice  cost  of  the  goods  available  for  sale  from  November  1? 

2.  What  was  the  invoice  cost  of  the  goods  purchased  during  November? 

3.  What  was  the  total  invoice  cost  of  merchandise  for  the  period? 

4.  What  was  the  invoice  cost  of  the  goods  returned,  the  amount  of  rebates 
and  allowances,  and  the  total  deductions  from  cost  for  the  period? 

5.  What  was  the  net  invoice  cost  of  merchandise  for  the  period? 

6.  What  was  the  invoice  cost  of  the  goods  remaining  unsold  on  November  30? 

7.  What  was  the  net  invoice  cost  of  goods  sold  for  the  period? 

8.  What  is  the  balance  of  the  account  and  what  does  it  represent? 


elementary  accounting  75 

Rules  for  Debiting  and  Crediting  Purchases  Account 


156.  Debit  for  the  invoice  cost  of 
merchandise  on  hand  at  the  beginning 
of  and  purchased  during  a  fiscal  period. 


157.  Credit  for  deductions  from  in- 
voice cost,  and  for  the  invoice  cost  of 
goods  unsold  at  the  close  of  the  period. 


To  Close  Purchases  Account 

158.  After  the  income  and  profit  and  loss  statement  has  been  prepared,  the 
purchases  account  is  closed  by  a  journal  entry  crediting  it  for  the  amount  of  its 
balance  shown  in  the  trial  balance.  When  this  entry  is  posted,  the  account  will 
be  in  balance  and  can  be  footed  and  ruled  as  shown  in  illustration  34. 

exercise  21 

C.  H.  Crook's  transactions  for.  January  affecting  the  purchases  account 
were  as  follows.     Record  them  in  an  account. 

Jan.    1  Inventory  of  merchandise  on  hand  at  beginning  of  business,  $1892.73. 

7  Bought  merchandise  for  cash,  $175.00. 

11  Received  credit  memorandum  for  purchases  returned,  $13.45. 

1 8  Bought  merchandise  for  cash  $  1 1 2 .42 . 

22  Received  credit  memorandum  for  defective  goods  purchased,  $42.80. 

25  Mr.  Crook  took  for  his  private  use  merchandise  which  cost  SI  1.85. 

31  Total  purchases  of  merchandise  during  month  per  total  of  purchases 

book,  $3695.48. 

31  Inventory  of  merchandise  unsold  at  end  of  month,  $1522.76. 

exercise  22 

Walter  E.  Lee's  transactions  affecting  the  purchases  account  for  January,  Feb- 
ruary, and  March,  in  monthly  totals,  are  as  follows: 

Jan.    1  Inventory  at  beginning  of  period,  $12,472.16. 

31  Total  of  purchases  returned  during  January,  $1 17.28. 

31  Total  of  purchases  book  for  January,  $3,278.46. 

Feb.  28  Total  of  rebates  and  allowances  received  during  February,  $96.19. 

28  Total  cash  purchases  during  February,  $276.80. 

28  Total  of  purchases  returned  during  February,  $161.20. 

28  Total  of  purchases  book  for  February,  $7,248.22.' 

Mar.  31  Total  of  rebates  and  allowances  received  during  March.  $39.25. 

31  Total  of  purchases  returned  during  March,  $185.40. 

31  Mr.  Lee  donated  to  charity  at  cost  goods  amounting  to  $75.40. 

31  Total  purchases  for  March  per  purchases  book,  $5,986.2 1 . 

31  Inventory  of  merchandise  unsold  at  end  of  period,  $13,786. 28. 


76  accountancy  and  business  management 

Additions  to  Invoice  Cost  of  Goods  Sold 

159.  The  balance  of  the  purchases  account  shows  the  net  invoice  cost  of 
goods  sold,  as  explained  in  ^f  155  and  illustrated  in  the  above  exercises.  There 
are  a  number  of  other  costs  and  expenses  incurred  in  purchasing  and  handling 
merchandise  which  increase  its  cost;  consequently,  they  must  be  added  to  the  net 
invoice  cost  of  goods  sold  in  finding  the  total  cost  of  goods  sold.  These  additional 
costs  and  expenses  include  incoming  freight,  express,  and  drayage  charges;  boxing, 
packing,  and  shipping  materials;  warehouse  wages,  supplies,  and  expenses;  salaries 
and  expenses  incurred  in  buying  goods,  etc.  Such  items  are  designated  as  "addi- 
tions to  cost,"  and  it  is  the  best  practice  to  keep  separate  accounts  for  them.  As  this 
practice  is  observed  in  this  text,  such  accounts  will  be  introduced  later  as  required. 

SALES  ACCOUNT        .      - 

160.  The  object  in  keeping  the  sales  account  is  to  ascertain  the  net  income 
from  sales  for  a  fiscal  period.  The  account  is  credited  for  the  selling  price  of  all 
goods  sold,  which  is  the  income  from  sales.  It  is  debited  for  all  items  which 
decrease  or  reduce  the  income  from  sales.  Such  items  are  designated  as  "deduc- 
tions from  sales,"  and  consist  of  goods  returned  for  credit,  rebates  and  allowances 
on  sales  for  defective  or  damaged  goods  and  overcharges,  and  similar  items. 

161.  The  credit  footing  of  the  sales  account  is  the  total  sales,  or  gross  sales. 
The  debit  footing  is  the  total  deductions  from  sales.  The  total  sales  minus  the 
total  deductions  is  the  net  income  from  sales,  which  is  the  balance  shown  by  the 
account. 

The  following  transactions  are  correctly  recorded  in  the  sales  account  which 
appears  on  page  77. 

Jan.  19    A  customer  was  allowed  a  rebate  of  $7.56  for  an  overcharge  on 
goods  previously  sold  to  him. 
21     Allowed  a  customer  a  credit  of  $12.40  for  damaged  goods. 
25    A  customer  reported  a  shortage  in  a  shipment  and  was  allowed 

a  credit  for  $15.18. 
31     A  customer  returned  goods  for  credit  amounting  to  $64.13. 
31     The  total  sales  for  the  month  as  shown  by  the  total  of  the  sales  book 
were  $7,124.38. 

•     analysis 

1.  What  were  the  total  sales  for  the  period? 

2.  What  was  the  amount  of  the  goods  returned  for  credit  and  the  total  of 
the  rebates  and  allowances  on  sales? 

3.  What  were  the  total  deductions  from  sales? 

4.  What  were  the  net  sales  for  the  period? 

5.  What  is  the  balance  of  the  account,  and  what  does  it  represent? 


ELEMENTARY  ACCOUNTING 


77 


Illustration  35 


J*~c 


ff 

2S 

3/ 
3/ 


0TS&L-O&tZ<4*<3^/ 


7 
/  z 

/s 

9    9 

7C2S 


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56, 

// 

/  3 

-i    7 


3- 


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3/ 


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7' 


3f 


Rules  for  Debiting  and  Crediting  Sales  Account 


162.     Debit     for     all     deductions 
from  the  selling  price  of  goods  sold. 


163.     Credit  for  the  selling  price 
of  all  goods  sold. 


To  Close  Sales  Account 

164.  After  the  income  and  profit  and  loss  statement  has  been  prepared 
the  sales  account  is  closed  by  a  journal  entry  debiting  it  for  the  amount  of  its 
balance  as  shown  in  the  trial  balance.  When  this  entry  is  posted,  the  account 
will  be  in  balance  and  can  be  footed  and  ruled  as  shown  in  illustration  35. 

exercise  23 

C.  G.  Kirwan's  transactions  affecting  the  sales  account  for  January  were 
as  follows.     Record  them  in  an  account. 

Jan.    3  Sold  merchandise  for  cash,  $27.60. 

10  Allowed  customer  credit  for  goods  returned,  $13.72. 

14  Sold  merchandise  for  cash,  $115.00. 

17  Allowed  customer  credit  for  overcharge  on  goods  sold  him,  $3.76. 

22  Allowed  customer  credit  for  damaged  goods,  $21.75. 

25  Sold  merchandise  for  cash,  $12.70. 

31  Total  sales  for  month  per  sales  book  total,  $4,278.89. 

EXERCISE  24 

TTynson  &  Westcott's  transactions  affecting  the  sales  account  for  the  months 
of  January,  February,  and  March,  in  monthly  totals,  are  as  follows: 

Jan.  31  Total  cash  sales  during  January,  $211.83. 

31  Total  sales  per  sales  book  for  January,  $7,898.85. 

31  Total  rebates  and  allowances  on  sales  during  January,  $368.40. 

Feb.  28  Total  sales  returned  during  February,  $122.19. 


78  ACCOUNTANCY  AND    BUSINESS   MANAGEMENT 

Feb.  28  Total  cash  sales  during  February,  $326.72. 

28  Total  rebates  and  allowances  on  sales  during  February,  $37.22. 

28  Total  sales  per  sales  book  for  February,  $8,688.78. 

Mar.  31  Total  sales  returned  during  March,  $422.16. 

31  Total  cash  sales  for  March  $521.73. 

31  Total  rebates  and  allowances  on  sales  during  March,  $78.21. 

31  Total  sales  per  sales  book  for  March,  $9,972.43. 

Other  Deductions  from  Sales 

165.  There  are  other  items  in  addition  to  those  named  in  paragraph  160 
which  reduce  the  income  from  sales,  but  such  items  are  not  entered  in  the  sales 
account.  It  is  the  best  practice  to  keep  separate  accounts  for  them,  and  such 
accounts  will  be  introduced  later  as  they  are  required. 

Cash  Sales 

166.  Cash  sales  are  those  sales  in  which  cash  is  received  immediately  for  the 
goods  sold.  They  are  "spot  cash"  sales  over  the  counter.  When  goods  are 
paid  for  immediately  there  is  no  reason  for  opening  an  account  with  the  customer. 
When  cash  registers  or  cash  drawers  are  used,  the  amount  received  for  cash  sales 
during  the  day  is  entered  as  one  item  in  the  cash  receipts  book  and  credited  to 
sales  account.  This  disposition  of  cash  sales  is  made  in  most  lines  of  business. 
When  goods  are  not  paid  for  immediately  an  account  is  opened  with  the  customer. 

INVENTORY  ACCOUNT 

167.  A  merchandise  inventory  is  a  list  of  merchandise  or  stock  in  trade 
on  hand  at  any  time.  It  is  necessary  to  take  an  inventory  of  the  merchandise 
on  hand  at  the  end  of  each  fiscal  period  in  order  to  ascertain  the  correct  profit  or 
loss  on  the  goods  sold,  because  the  inventory  of  unsold  goods  must  be  deducted 
from  the  total  invoice  cost  of  merchandise  to  ascertain  the  net  invoice  cost  of 
goods  sold  for  the  period.     Read  If's  153,  154,  and  155. 

168.  The  object  in  keeping  the  inventory  account  is  to  record  in  the  ledger 
the  value  of  the  merchandise  on  hand  at  the  end  of  any  fiscal  period.  The 
inventory  is  a  current  asset  which  should  be  included  in  the  statement  of  assets  and 
liabilities.  The  account  on  the  next  page  shows  the  proper  entries  for  inventories 
taken  on  October  31,  November  30,  and  December  31. 

Explanation:  The  inventory  of  $6842.19  was  debited  to  the  inventory  account 
on  October  31,  when  the  books  were  closed  for  that  month.  Reference  to  illus- 
tration 34  on  page  74  will  show  that  when  the  books  were  opened  again  for  the  next 
period  on  November  1,  this  inventory  was  debited  to  the  purchases  account.  At 
the  same  time  it  was  credited  to  the  inventory  account  as  shown  above.     As  the 


ELEMENTARY  ACCOUNTING 


79 


inventory  account  was  then  in  balance,  the  balancing  items  were  ruled  out.  On 
November  30,  when  the  books  were  closed  again,  the  inventory  of  $8716.42  on  hand 
at  that  date  was  debited  to  the  inventory  account  and  credited  to  the  purchases 
account,  as  shown  in  the  two  illustrations.  When  the  books  were  opened  again 
on  December  1  for  the  next  period  the  purchases  account  was  debited  (this  entry 
is  not  shown  in  illustration  34  because  it  only  includes  November  items)  and  was 
credited  to  the  inventory  account,  which  again  brought  that  account  into  balance. 

Illustration  36 


*r4r7vsi*lwfcHsis 


\3/ 

30 
3/ 


I,  fa  2 


rf?{(t 


J^-/L> 


L2- 

±£J- 


V£~ 


t>fa_2- 


?//(« 


AL2_ 


4. 


ANALYSIS 

What  account  was  credited  when  the  inventory  account  was  debited  on 

December  31  for  $7516.45? 

When  the  books  are  opened  again  on  January  1  what  account  will  be 

debited  and  what  account  credited  for  this  amount? 

Why  is  the  inventory  account  debited  and  purchases  account  credited 

for  the  inventory  on  hand  at  the  close  of  a  fiscal  period? 

Why  is  the  purchases  account  debited  and  the  inventory  account  credited 

for  the  inventory  on  hand  at  the  beginning  of  a  period? 

Rules  for  Debiting  and  Crediting  Inventory  Accounts 


169.     Debit  for  the  inventory  on 
hand  at  the  end  of  any  fiscal  period. 


170.  Credit  for  the  same  inven- 
tory at  the  beginning  of  the  next  fiscal 
period. 

exercise  25 

Jan.   1,   1922.     R.  L.  Johnson's  inventory  of  merchandise  debited  to  the 
inventory  account  on  his  books  at  the  beginning  of  the  year  was  $3,278.42. 
Dec.  31,  1922.     His  inventory  at  the  end  of  the  year  was  $4,391.12. 

1.  Open  the  Inventory  Account,  debiting  it  with  the  inventory  of  Jan.  1. 

2.  What  entries  are  required  to  transfer  this  inventory  from  the  inven- 
tory account  to  the  purchases  account  at  the  beginning  of  business 


80  ACCOUNTANCY   AND   BUSINESS   MANAGEMENT 

on  Jan.  1?     Make  the  entries  in  the  two  accounts  and  rule  out 
any  balancing  items. 
3.     Make  the  entries  required  to  transfer  the  inventory  of  Dec.  31 
from  the  purchases  to  the  inventory  account. 

exercise  26 

Dec.  31,  1923.  Mr.  Johnson's  inventory  at  the  end  of  the  year  1923  was 
$5,678.40. 

1.     Follow  instructions  given  in  paragraphs  2  and  3  in  the  above  exercise. 

FREIGHT,  EXPRESS,  AND  DRAYAGE  CHARGES 

171.  Freight  and  express  charges  are  the  amounts  paid  for  the  transportation 
of  goocjs  by  public  carrier.  Drayage  and  cartage  charges  represent  the  cost  of 
hauling  goods  from  freight  stations  to  the  warehouse  or  to  other  freight  stations, 
and  from  the  warehouse  to  freight  stations  or  other  points  of  delivery.  As  under- 
stood by  accountants  the  term  "freight"  includes  all  freight,  express,  cartage, 
postage,  and  other  charges  assessed  for  the  transportation  of  goods. 

172.  The  terms  on  which  goods  are  bought  and  sold  generally  indicate 
which  of  the  parties  is  to  pay  transportation  charges.  Goods  shipped  "f.  o.  b." 
(free  on  board)  means  that  the  seller  delivers  the  goods  on  board  the  cars,  boat  or 
ship,  after  which  they  are  transported  at  the  expense  of  the  buyer.  "Charges 
prepaid"  generally  means  that  the  seller  of  goods  shipped  f .  o.  b.  pays  the  freight 
or  express  charges  at  the  point  of  shipment  for  the  buyer,  and  that  the  buyer 
becomes  indebted  to  the  seller  for  the  amount.  Goods  shipped  "f.  o.  b.  delivery 
point"  means  that  the  seller  is  to  pay  the  carrying  charges;  if  they  are  paid  by  the 
buyer  the  seller  becomes  indebted  to  him  for  the  amount.  However,  in  any  case 
it  is  a  matter  of  agreement  between  the  parties  when  the  sale  is  made  as  to  who  is  to 
bear  the  expense  of  the  transportation  charges. 

173.  There  are  two  kinds  of  freight  from  an  accounting  standpoint.  Incom- 
ing freight  (or  "freight  in")  consists  of  all  transportation  charges  on  goods  pur- 
chased. Outgoing  freight  (or  "freight  out"')  consists  of  all  such  charges  on  goods 
sold. 

FREIGHT  IN  ACCOUNT 

174.  Freight  In  account  is  one  of  the  accounts  included  in  the  group  desig- 
nated as  "additions  to  cost."  Read  ^[159.  The  account  is  debited  for  the  cost 
of  freight,  express,  and  drayage  charges  paid  on  goods  purchased.  It  is  credited 
for  the  amount  of  any  of  these  charges  rebated  and  returned  because  of  over- 
charges resulting  from  mistakes  in  rating,  etc.  Its  balance  shows  the  net  increase 
in  cost  for  incoming  freight  to  be  added  to  the  net  invoice  cost  of  goods  sold  in 
finding  the  total  cost  of  goods  sold  for  a  fiscal  period.  Inward  freight  is  a  trading 
expense. 


ELEMENTARY    ACCOUNTING 


81 


Illustration  37 


Freight  In 


Jan. 


Freight 
Express 
Freight 
Drayage  bill 
Express 
Drayage  bill 


12 

16 

Jan. 

17 

9 

28 

28 

21 

74 

31 

22 

50 

5 

40 

19 

50 

90 

58 

Rebate  on  dra.  1/5 
Rebate  on  frt.  1/9 
To  close 


90  58 


ANALYSIS 

1.  What  should  the  charges  have  been  for  the  freight  entered  on  January  9? 

2.  What  should  have  been  the  amount  of  the  drayage  bill  entered  on  January 
15? 

3.  What  were  the  total  freight,  express,  and  drayage  charges  for  the  month? 

4.  What  were  the  total  rebates  on  these  charges? 

5.  What  is  the  balance  of  the  account,  and  what  does  it  show? 

Rules  for  Debiting  and  Crediting  Freight  In  Account 


175.     Debit  for  incoming  freight, 
express,  drayage,  and  postage  charges. 


176.     Credit  for  rebates  or  allowances 
on  such  charges. 


177.  To  close.  After  the  income  and  profit  and  loss  statement  has  been 
prepared,  this  account  is  closed  by  a  journal  entry,  crediting  it  for  the  amount  of 
its  balance  shown  in  the  trial  balance.  The  account  is  then  footed  and  ruled  as 
shown  in  illustration  37. 

exercise  27 

L.  C.  Rusmisel's  transactions  affecting  the  freight  inward  account  are  the 
following.     Record  them  in  an  account. 

June  2  Paid  freight  bill  on  goods  purchased,  $42.65. 

8  Paid  express  charges  on  incoming  goods,  $7.63. 

15  Paid  freight  on  goods  purchased,  $35.72. 

21  Received  rebate  for  overcharge  on  freight  paid  on  June  2,  $11.22. 

28  Paid  expressage  on  incoming  goods,  $3.16  . 

30  Paid  bill  of  City  Transfer  Co.  for  hauling  incoming  goods  from 
freight  stations  to  store,  $8.50. 


S2 


ACCOlXTANO     AND    BUSINESS    MANAGEMENT 


WAREHOUSE  EXPENSE  ACCOUNT 

178.  Warehouse  expenses  consist  of  the  expenditures  for  labor  employed 
and  supplies  used  in  handling  merchandise  in  the  warehouse  or  store.  They  thus 
consist  of  the  expenses  of  receiving,  unpacking,  placing  in  stock,  and  preparing 
merchandise  for  sale  or  shipment,  such  as  the  cost  of  labor  and  boxing,  packing, 
and  shipping  materials  and  supplies. 

179.  The  warehouse  expense  account  is  one  of  the  accounts  in  the  group 
designated  as  "additions  to  cost."  It  is  debited  for  the  cost  of  warehouse  expenses. 
It  is  credited  for  rebates  resulting  from  overcharges  and  such  other  items  as  reduce 
the  cost  of  such  expenses.  The  balance  of  the  account  shows  the  net  increase  in 
cost  for  warehouse  expenses  to  be  added  to  the  net  invoice  cost  of  goods  sold  in 
finding  the  total  cost  of  goods  sold  for  a  fiscal  period.  Warehouse  expenses  are 
trading  expenses. 


Illustration  38 


Warehouse  Expense 


Jan. 


Boxes 

Paper  and  twine 

Cartons 

Wages 

Nails,  strapping,  etc. 

Wages 


48 

00 

Jan. 

14 

18 

25 

22 

26 

50 

31 

80 

00 

15 

80 

80 

00 

268 

55 

Rebate  on  boxes 
Cartons  sold 
To  close 


3 

4 

261 


268 


56 


ANALYSIS 

1  What  should  have  been  the  amount  of  the  bill  for  boxes  entered  on  Jan- 
uary 5? 

2.  What  was  the  expense  for  warehouse  labor  for  the  month? 

3.  What  was  the  expense  for  materials  and  supplies? 

4.  What  were  the  total  charges  to  warehouse  expense? 

5.  How  much  were  these  charges  reduced  by  rebates  and  other  credits? 

6.  What  is  the  balance  of  the  account,  and  what  does  it  show? 

Rules  for  Debiting  and  Crediting  Warehouse  Expense  Account 


180.     Debit  for  the  cost  of  ware- 
house labor  and  supplies. 


181 .     Credit  for  deductions  from  the 
cost  of  items  charged  to  the  account. 


182.  To  close.  After  the  income  and  profit  and  loss  statement  has  been 
prepared,  this  account  is  closed  by  a  journal  entry  crediting  it  for  the  amount  of 
its  balance  shown  in  the  trial  balance.  The  account  is  then  footed  and  ruled  as 
shown  in  illustration  38. 


ELEMENTARY    ACCOUNTING  83 

EXERCISE   28 

Record  the  following  transactions  affecting  R.  L.  Strong's  warehouse  expense 
account: 

Aug.  3     Paid  bill  for  nails,  twine,  and  wrapping  paper,  $17.65. 
8     Paid  bill  for  packing  cases  and  boxes,  $79.60. 
11     Paid  bill  for  box  strapping  and  small  tools,  $9.20. 
15     Paid  wages  of  warehouseman  and  shipping  clerk,  $110.00. 
17     Sold  six  cases  to  accommodate  neighboring  merchant  for  cash, 

$4.50. 
22     Paid  bill  for  excelsior  and  barrels,  $6.50. 

27     Received  rebate  for  overcharge  on  boxes  paid  for  on  August  8,  $4.40. 
31    Paid  wages  due  today,  $110.00. 

GROSS  TRADING  PROFIT 

183.  In  a  mercantile  or  trading  business,  the  gross  trading  profit  is  the  excess 
of  net  income  from  sales  over  the  total  cost  of  goods  sold.  It  represents  the  profit 
resulting  from  the  buying  and  selling  operations.  It  is  ascertained  by  deducting 
from  the  net  income  from  sales  the  total  cost  of  goods  sold.  If  the  total  cost  of 
goods  sold  should  exceed  the  net  income  from  sales,  the  difference  is  the  gross 
trading  loss. 

The  following  tabulation,  prepared  for  illustrative   purposes  from  the  ac- 
counts shown  in  illustrations  34,  35,  37,  and  38,  gives  the  gross  trading  profit 
resulting  from  the  buying  and  selling  operations  recorded  in  those  accounts: 
Net  income  from  sales  7025.11 

Net  invoice  cost  of  goods  sold     5098.64 
Additions  to  cost: 

Freight  in  82.96 

Warehouse  expense  261.55 

Total  cost  of  goods  sold  5443.15 

Gross  Trading  Profit  1581.96 

ANALYSIS 

1.  The   net  income  from   sales  is   the    debit    footing,  credit   footing,    or 
balance  of  what  account? 

2.  The  net  invoice  cost  of  goods  sold  is  the  debit  footing,  credit  footing,  or 
balance  of  what  account? 

3.  By  what  amount  was  the  net  invoice  cost  of  goods  sold  increased  by- 
additions  to  cost? 

4.  If  there  had  been  no  deductions  from  sales,  what  would  have  been  the 
net  income  from  sales? 


84  ACCOUNTANCY   AND   BUSINESS   MANAGEMENT 

5.  If  there  had  been  no  deductions  from  the  invoice  cost  of  merchandise, 
what  would  have  been  the  net  invoice  cost  of  goods  sold  and  the  total 
cost  of  goods  sold? 

6.  If  the  inventory  of  November  30  had  been  $7716.42,  what  would  have 
been  the  gross  trading  profit? 

exercise  29 

Prepare  tabulations  showing  the  gross  trading  profit  or  gross  trading  loss 
from  the  two  following  groups  of  accounts: 

A  B 

Sales                            9728.60  Sales  15893.21 

Purchases                     7263.22  Purchases  14938.20 

Freight  In                       236.78  Freight  In  573.98 

Warehouse  Expense      498.16  Warehouse  Expense  1216.93 

EXPENSES 

184.  In  general,  expenses  are  the  expenditures  for  services  and  supplies 
required  in  conducting  the  activities  and  operations  of  a  business,  but  for 
which  no  permanent  value  is  secured.  They  consist  of  the  expenditures  of 
funds  which  necessarily  must  be  made  in  carrying  on  the  operations  from  which 
the  income  and  profits  of  a  business  are  derived.  These  expenditures  do  not 
represent  permanent  investments  of  funds,  but  on  the  contrary,  they  represent 
the  cost  of  services  and  of  materials  and  supplies  that  are  used  or  consumed. 
Expenses  include  the  cost  of  such  items  as  rent,  fuel,  light,  taxes,  insurance,  postage, 
office  supplies  and  stationery,  telephone  and  telegraph  charges,  freight,  express, 
and  drayage  charges,  warehouse  expenses,  interest  on  borrowed  money,  salaries  of 
the  proprietor  or  manager,  office  help,  and  clerks,  etc. 

185.  When  it  is  possible  to  determine  accurately  the  expenses  of  any  particu- 
lar department  or  operation  of  a  business,  they  are  classified  or  segregated  in  a 
separate  account  or  accounts  so  they  can  be  charged  against  the  department  or 
operation  in  connection  with  which  they  were  incurred.  For  instance,  the  freight 
in  and  warehouse  expense  accounts  include  the  cost  of  two  classes  of  expense 
items  incurred  directly  in  connection  with  the  merchandising  operations,  and 
hence  are  included  in  the  cost  of  such  operations. 

186.  Expenses  which  cannot  properly  be  charged  entirely  to  any  particular 
department  or  operation,  but  which  are  applicable  to  and  incurred  by  the  business 
as  a  whole,  are  referred  to  in  the  smaller  businesses  as  general  or  operating  ex- 
penses, and  are  recorded  in  one  account  under  the  title  of  "Expense,"  or  'General 
Expense."  These  expenses  include  such  items  as  rent,  fuel,  light,  taxes,  insurance, 
etc.  If  desired,  the  expense  account  may  be  analyzed  at  any  time  to  determine 
the  cost  of  each  separate  item  of  expense. 


ELEMENTARY    ACCOUNTING 
EXPENSE  ACCOUNT 


85 


187.  The  expense  account  is  debited  for  the  cost  of  all  general  expenses.  It 
is  credited  for  any  deductions  in  the  cost  of  items  charged  to  it.  The  balance  of  the 
account  shows  the  net  cost  of  the  general  expenses,  which  must  be  deducted  from 
the  gross  trading  profit  in  finding  the  net  profit  for  a  fiscal  period.  In  case  there 
is  a  gross  trading  loss,  the  expenses  must  be  added  in  determining  the  net  loss. 


Illustration  39 


fScT^Wg^g^ 


Jkns 


ft* 

/? 

3/ 
3/ 


J 

SO 

7* 

OcZtv. 

3/ 
3/ 

/ 

so 

3 

r/ 

a/o 

/  /O 

f£ 

2S 


sL 


£-L_ 


Analysis 

1.  What  were  the  total  general  expenses  for  January? 

2.  If  the  $25.00  credited  to  the  account  on  January  31  was  received  for 
space  rented  to  another  merchant,  what  was  the  net  expense  for  rent  for 
the  month? 

3.  What  is  the  balance  of  the  account,  and  what  doete  it  represent? 

Rules   for   Debiting    and   Crediting   Expense   Account 


188.     Debit  for  the  cost  of  all  gen- 
eral expenses. 


189.     Credit  for  deductions  from  the 
cost  of  items  charged  to  the  account. 


190.  To  close.  After  the  income  and  profit  and  loss  statement  has  been 
prepared,  this  account  is  closed  by  a  journal  entry  crediting  it  for  the  amount  of 
its  balance  shown  in  the  trial  balance.  The  account  is  then  footed  and  ruled  as 
shown  in  illustration  39. 


exercise  30 


them. 


H.  A.  Bacon's  expenses  for  October  were  as  follows.     Prepare  an  account  for 


Oct.    1  Paid  rent  of  store  for  the  month.  $65.00. 

10  Bought  5  tons  coal  for  heating,  $37.50. 

13  Bought  postage  stamps,  $5.00. 

18  Paid  electric  light  bill,  $2.48. 


86  ACCOUNTANCY   AND   BUSINESS  MANAGEMENT 

24     Bought  letterheads,  envelopes,  and  office  supplies,  $22.40. 
28    Paid  telephone  bill,  $5.30. 
31     Paid  clerk's  salary,  $60.00. 

EXERCISE  31 

The  Central  Drug  Company's  expenses  for  February  were  the  following: 

Feb.    1  Paid  rent  for  store  and  warehouse,  $135.00. 

2  Paid  gas  and  electric  light  bill,  $11.86. 

10  Paid  bill  for  building  new  shelves  and  sundry  repairs,  $45.00. 

12  Paid  printing  bill  for  advertising  matter,  $75.60. 

15  Paid  clerks'  salaries  and  wages,  $265.00. 

18  Paid  bill  for  automobile  oils  and  gasoline,  $26.52. 

20  Paid  telephone  bill,  $7.85. 

22  Received  cash  for  overpayment  on  bill  paid  on  Feb.  18,  $2.00. 

27  Paid  traveling  expenses  of  salesman,  $35.80. 

28  Paid  clerks'  salaries  and  wages,  $265.00. 

INTEREST  AND  DISCOUNT 

191.  Interest  and  discount  are  charges  paid  for  the  use  of  money.  When  the 
charge  is  paid  after  the  money  has  been  used,  it  is  called  interest;  when  the  charge 
is  paid  before  the  money  is  received,  it  is  called  discount.  Discount  is  interest  paid 
in  advance.  This  is  the  only  real  difference  in  the  terms  and  consequently  for 
bookkeeping  purposes  the  term  "interest"  applies  to  both  interest  and  discount. 

Illustration.  If  A  borrows  $100  from  B  for  one  year  at  6%  interest,  at  the 
expiration  of  that  time  (after  he  has  had  the  use  of  the  money)  he  will  return 
to  B  $100  plus  $6,  or  $106.  The  $100  is  in  payment  of  the  loan.  The  $6  is  in 
payment  for  the  use  of  $100  for  one  year.  If  the  $6  is  deducted  from  the  $100 
when  the  loan  is  made,  the  interest  is  then  called  discount,  because  it  is  paid  in 
advance,  or  before  the  borrower  has  had  the  use  of  the  money. 

192.  Interest  is  received  and  paid  in  connection  with  many  kinds  of  business 
transactions,  the  more  common  of  which  are: 

(a)  Interest  paid  by  banks  to  depositors  for  funds  on  deposit  with  them. 

(b)  Interest  paid  by  their  customers  to  banks  for  funds  borrowed. 

(c)  Interest  received  and  paid  on  notes  receivable  and  notes  payable  rep- 
resenting debts  arising  out  of  current  routine  transactions  between  busi- 
ness concerns. 

(d)  Interest  received  and  paid  on  past-due  open  book  accounts. 

(e)  Interest  received  and  paid  on  mortgages,  bonded  indebtedness,  and  such 
long-time  obligations,  which  are  fixed  liabilities. 

193.  Most  debts  upon  which  interest  is  to  be  received  or  paid  are  evidenced 
by  notes  receivable  or  notes  payable,  which  stipulate  the  rate  at  which  the  interest 
is  to  be  calculated.     Such  notes  are  called  interest-bearing  notes.     In  most  states 


ELEMENTARY   ACCOUNTING  87 

the  legal  rate  of  interest  is  6%,  but  in  some  states  the  legal  rate  is  as  high  as  12%. 
The  charging  of  interest  in  excess  of  the  legal  state  rate  is  unlawful. 

194.  Interest  is  calculated  on  an  interest-bearing  note  from  the  date  of  the 
note  to  the  date  upon  which  it  is  paid.  Discount  is  calculated  for  the  exact  num- 
ber of  days  from  the  date  of  discount  to  the  due  date.  An  interest-bearing  note  is 
discounted  for  the  amount  of  the  note,  which  is  the  face  of  the  note  plus  the  interest. 
The  amount  of  the  note  less  the  discount  equals  the  proceeds,  which  is  the  value  of 
the  note  on  the  date  it  is  discounted.  Interest  on  an  open  book  account  is  cal- 
culated from  the  date  on  which  the  account  is  due  to  the  date  on  which  it  is  paid. 

INTEREST  INCOME  ACCOUNT 

195.  Interest  received  is  income  earned  for  the  use  of  money  loaned.  From 
the  standpoint  of  the  business  man  who  extends  credit  to  his  customers,  it  repre- 
sents an  earning  of  capital  because  the  capital  he  has  invested  in  his  business  is 
sufficient  to  enable  him  to  continue  to  carry  the  accounts  of  debtors  when  they 
fail  to  pay  their  debts  within  the  usual  term  of  credit.  Under  these  circumstances 
a  creditor  indirectly  lends  money  to  his  debtors  by  giving  them  the  use  of  a  part 
of  his  capital.  Interest  received  is  therefore  frequently  referred  to  as  a  capital 
income,  to  distinguish  it  from  operating  income. 

196.  Interest  received  is  recorded  in  the  interest  income  account,  which  is 
credited  for  all  such  interest  and  debited  for  any  rebates  to  others  resulting  from 
overpayments  of  interest  charges.  The  balance  of  the  account  is  the  net  income 
from  interest  received.  The  account  is  included  in  the  group  designated  as  "addi- 
tions to  income,"  and  its  balance  is  added  to  the  gross  trading  profit  in  finding  the 
gross  income  for  a  fiscal  period. 

INTEREST  EXPENSE  ACCOUNT 

197.  Interest  paid  is  an  expense  incurred  for  the  use  of  money  which  it  is 
necessary  to  borrow  because  the  capital  invested  is  not  sufficient  to  meet  all  debts 
and  obligations  when  they  mature.  It  represents  an  expense  which  would  not 
be  incurred  if  the  capital  invested  were  sufficient  to  finance  promptly  all  the  opera- 
tions of  a  business.  Interest  paid  is  therefore  frequently  referred  to  as  a  capital 
expense,  to  distinguish  it  from  operating  expenses. 

198.  Interest  paid  is  recorded  in  the  interest  expense  account,  which  is 
debited  for  such  interest  and  credited  for  any  rebates  received  from  others  resulting 
from  overpayments  of  interest  charges.  The  balance  of  the  account  is  the  net 
expense  for  interest  paid.  The  account  is  included  in  the  group  designated  as 
"deductions  from  income,"  and  its  balance  is  deducted  from  the  gross  income  in 
finding  the  net  profit  for  a  fiscal  period. 

The  following  transactions  are  correctly  classified  and  recorded  in  the  interest 
expense  and  interest  income  accounts  which  appear  below. 


,sS 


ACCOUNTANCY    AND    BUSINESS   MANAGEMENT 


Mar.  2    Paid  interest  on  note  due  today  at  bank,  $9.17. 

5    Received  interest  from  a  customer  on  note  due  today  but  renewed 

at  his  request,  $4.48. 
7     The  bank  discounted  a  note  for  $300.00,  deducting  discount  amount- 
ing to  $3.00. 
12     Paid  an  interest  bearing  note  due  today,  the  interest  amounting 

to  $5.72. 
17     Received  interest  on  a  past  due  account  amounting  to  $6.60. 
17     Allowed  customer  credit  on  the  above  interest  for  error  in  calculating, 

$3.30. 
25     Paid  interest  on  a  note  due  today,  $7.80. 

31     Received  credit  from  bank  for  interest  accrued  on  daily  bank  balance 
for  quarter  ending  March  31,  $17.16. 


Illustration  40 


Interest  Income 


Mar. 


To  close 


3 

30 

Mar. 

5 

24 

94 

17 
31 

28 

21 

4 
6 

17 


28 


48 
60 
16 
24 


Illustration  41 


Interest  Expense 


Mar. 


9 

17 

Mar. 

31 

3 

00 

5 

72 

7 

SO 

25 

09 

To  close 


25 


25 


69 


69 


ANALYSIS 

What  was  the  total  income  from  interest  received  for  the  month? 

Were  there  any  deductions  from  this  income,  and  if  so,  what  was  the  net 

income  from  interest  received? 

What  is  the  balance  of  the  interest  income  account,  and  what  does  it 

show? 


ELEMENTARY    ACCOUNTING  89 

4.  What  was  the  expense  for  interest  paid  during  the  month? 

5.  Were  there  any  deductions  from  interest  expense? 

6.  What  is  the  balance  of  the  interest  expense  account,  and  what  does  .it 
show? 

Rules  for  Debiting  and  Crediting  Interest  Income  Account 


199.     Debit  for  items  which  reduce 
the  income  from  interest  received. 


200.     Credit  for  all  income  from 
interest  received. 


Rules  for  Debiting  and  Crediting  Interest  Expense  account 


201.     Debit   for   the   expense   in- 
curred for  interest  paid. 


202.  Credit  for  any  items  which 
reduce  the  expense  incurred  for  interest 
paid. 

203.  To  close.  After  the  income  and  profit  and  loss  statement  has  been 
prepared,  the  interest  income  account  is  closed  by  a  journal  entry  debiting  it  for 
the  amount  of  its  balance  shown  in  the  trial  balance.  The  interest  expense  account 
is  closed  by  a  journal  entry  crediting  it  for  the  amount  of  its  balance.  The  accounts 
may  then  be  footed  and  ruled  as  shown  in  illustrations  40  and  41. 

EXERCISE    32 

C.  J.  Boone's  transactions  for  July  affecting  the  interest  expense  and  income 
accounts  are  as  follows.     Record  them  in  the  proper  accounts. 

July   2    Paid  interest  on  note  due  at  bank,  $7.45. 

5    Received  interest  on  note  due  today,  $5.20. 

8    The  bank  discounted  a  note,  deducting  discount  amounting  to  $3.68. 

11  Received  interest  from  customer  on  a  note  due  today  but  renewed 
at  his  request,  $8.38. 

12  Paid  interest  bearing  note  due  today,  the  interest  amounting  to  $9.22. 
15    Paid  interest  on  an  overdue  account  amounting  to  $7.48. 

15    Received  interest  from  customer  on  overdue  account,  $9.02. 
15    Allowed  customer  credit  on  above  interest  for  error  in  calculating 
it,  $1.68. 

17  The  bank  discounted  a  note,  deducting  discount  amounting  to  $6.42. 

18  Received  rebate  on  interest  paid  on  July  12,  the  interest  being  due 
for  30  days  instead  of  60  days,  $4.61. 

21     Received  interest  on  note  due  today,  $7.43. 

31     Received  credit  from  bank  for  interest  accrued  on  bank  balance, 
$16.21. 

CAPITAL  INVESTMENT  ACCOUNTS 

204.  In  almost  every  business  some  part  of  the  invested  capital  is  reinvested 
in  the  property  and  equipment  of  various  kinds  required  in  conducting  it,  such  as 


90  ACCOUNTANCY    AND    BUSINESS   MANAGEMENT 

rial  estate,  furniture  and  fixtures,  machinery  and  tools,  delivery  equipment,  etc. 
Property  of  this  kind  is  to  be  distinguished  from  the  merchandise  purchased  and 
from  the  materials  and  supplies  consumed  in  operating  the  business.  The  property 
required  in  conducting  a  business  is  used  continuously  over  a  period  of  years  and 
consequently  the  sums  required  to  purchase  it  are  more  or  less  permanent  invest- 
ments of  capital.  Such  investments  constitute  that  part  of  the  invested  capital 
which  is  not  immediately  available  for  the  payment  of  current  debts  and  expenses. 
For  these  reasons  such  investments  are  referred  to  as  capital  investments,  and 
the  accounts  in  which  they  are  recorded  are  called  capital  investment  accounts. 
The  properties  themselves  are  referred  to  as  capital  assets,  or  fixed  capital  assets. 

205.  A  capital  investment  account  should  be  debited  for  the  cost  of  th3 
capital  asset  acquired.  It  is  credited  only  for  the  cost  of  the  whole  or  any  part  of 
the  asset  that  is  sold  or  otherwise  disposed  of,  the  purpose  being  to  have  the  balance 
of  the  account  represent  at  all  times  the  cost  of  the  property  on  hand.  Any  profit  or 
loss  resulting  from  the  sale  of  a  capital  asset  is  recorded  in  a  separate  account 
opened  for  that  purpose. 

EXPENSE   AND   INCOME   ACCOUNTS   RELATING   TO   CAPITAL   ASSETS 

206.  Expenses  are  incurred  and  incomes  are  sometimes  earned  in  connection 
with  the  ownership  and  use  of  capital  assets.  The  various  expenses  incurred  in 
their  maintenance  may  be  recorded  in  separate  expense  accounts,  instead  of  charg- 
ing them  to  the  general  expense  account,  when  it  is  desired  to  know  the  cost  of 
maintaining  each  particular  property.  Likewise,  some  properties  classed  as 
capital  assets  produce  incidental  incomes  which  are  not  a  part  of  the  principal 
income  resulting  from  the  regular  operations  of  the  business,  and  hence  are  recorded 
in  separate  accounts.  Such  incomes  are  secured  by  renting  vacant  space  in  build- 
ings, leasing  idle  machinery,  hiring  the  use  of  equipment  to  others,  etc. 

207.  The  question  arises  frequently  as  to  whether  expenditures  made  in 
connection  with  capital  assets  should  be  charged  to  the  investment  account  or  to 
the  expense  account.     The  following  rules  are  usually  observed  by  accountants: 

(a)  All  expenditures  on  a  capital  asset,  whether  for  first  cost  or  for  improve- 
ments, up  to  the  time  the  property  is  ready  for  use  or  becomes  productive 
should  be  charged  to  the  investment  account. 

(b)  All  sums  expended  on  a  capital  asset  which  increase  its  efficiency  as  an 
income-producing  factor  or  its  market  value  as  an  investment  should  be 
charged  to  the  investment  account. 

(c)  All  sums  expended  to  maintain  a  capital  asset  at  its  normal  efficiency 
as  an  income  producing  factor  or  at  its  original  cost  or  investment  value 
should  be  charged  to  the  expense  account. 


ELEMENTARY   ACCOUNTING  91 

REAL  ESTATE  ACCOUNT 

208.  Real  estate  is  a  general  name  that  is  applied  to  real  property,  which 
consists  of  land  and  the  houses,  buildings,  and  permanent  improvements  erected 
thereon.  An  investment  account  with  all  of. the  real  property  owned  may  be 
kept  under  the  title  of  "Real  Estate,"  or  "Real  Estate  Investment,"  but  it  is 
better  practice  when  more  than  one  property  is  owned  to  open  an  account  with 
each  piece  of  property  under  an  appropriate  heading,  such  as,  "House  and  lot, 
96  North  Street,"  and  "Elm  Township  Farm." 

209.  The  real  estate  account  is  a  typical  capital  investment  account  repre- 
senting a  permanent  investment  in  a  capital  asset.  The  object'  in  keeping  it  is 
to  show  the  original  cost  of  an  investment  in  real  property,  which  includes: 

(a)  The  first  cost  of  the  property  purchased,  including  the  land,  buildings, 
and  other  improvements  thereon,  and  the  cost  of  surveying,  examination 
of  title,  recording  fees,  etc. 

(b)  The  cost  of  all  permanent  improvements  which  result  in  increasing  the 
earning  or  rental  value  of  the  property,  such  as  repairs  and  alterations, 
grading,  sidewalks,  etc. 

(c)  The  cost  of  taxes,  interest  on  mortgages,  or  other  similar  items  in-urred 
prior  to  the  time  the  property  becomes  productive  or  is  ready  for  use. 

210.  The  cost  of  these  items  constitutes  the  investment  in  the  property. 
The  account  is  credited  for  the  original  cost  of  the  whole  or  any  part  of  the  prop- 
erty sold  or  otherwise  disposed  of.  The  balance  of  the  account  at  all  times  is  the 
original  cost  of  the  property  on  hand,  which  is  a  fixed  capital  asset  that  should 
appear  in  the  statement  of  assets  and  liabilities. 

The  following  transactions  are  recorded  in  the  account  which  appears  on  the 
next  page: 

Jan.  1     Purchased  an  80  ft.  lot  improved  by  a  40  x  60  ft.  building  known  as 

9  West  Main  Street  for  a  purchase  price  of  $11,500,  the  cost  of  the 

lot  being  $6,000  and  of  the  building  $5,500. 

5  Paid  contractor's  bill  of  $450.00  for  permanent  improvements  and 
alterations  on  the  store  building. 

6  Paid  for  examining  the  title  and  recording  the  deed  for  the  property, 
$63.75. 

12    Paid  for  repairing  the  sidewalk  and  putting  in  new  front  steps,  $86.25. 

The  property  was  ready  for  use  on  January  15. 
25    Sold  the  vacant  half  of  the  lot  for  cash,  $3,000. 

ANALYSIS 

1.  What  was  the  purchase  price  of  the  property  when  it  was  taken  over? 

2.  How  much  was  spent  for  improvements  and  other  outlays  until  the  time 
the  property  was  ready  for  use? 


92 


ACCOUNTANCY  AND    BUSINESS   MANAGEMENT 


Illustration  42 


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r&ty, 

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3.  What  was  the  original  cost  price  of  the  entire  investment? 

4.  Why  was  the  account  credited  for  $3,000? 

5.  What  is  the  balance  of  the  account,  and  what  does  it  represent? 

FURNITURE  AND  FIXTURES  ACCOUNT 

211.  Furniture  and  fixtures  is  a  general  name  applied  to  the  furniture, 
fixtures,  machines,  and  appliances  required  to  equip  business  offices  and  stores 
for  the  efficient  transaction  of  business.  The  cost  of  such  furniture  and  equip- 
ment is  recorded  in  the  furniture  and  fixtures  account,  which  is  another  typical 
capital  investment  account.  It  is  debited  for  the  cost  of  all  furniture  and  equip- 
ment. It  is  credited  for  the  cost  price  of  anything  sold  which  has  previously  been 
charged  to  the  account.  The  balance  of  the  account  is  at  all  times  the  cost  of  the 
furniture  and  equipment  on  hand,  which  is  a  fixed  capital  asset  that  should  appear 
in  the  statement  of  assets  and  liabilities. 


Illustration  43 


tZz^t^/y?^£f^j>/  ^kttJ^J&sAaJ 


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ELEMENTARY   ACCOUNTING 


93 


ANALYSIS 

1.  What  was  the  total  cost  of  the  furniture  and  fixtures  charged  to  the  above 
account? 

2.  What  reasons  can  be  suggested  for  the  credit  to  the  account  dated  Jan- 
uary 31  for  S5.00? 

3.  At  what  price  was  the  copy  press  credited  to  the  account? 

4.  What  is  the  balance  of  the  account,  and  what  does  it  represent? 

Rules  for  Debiting  and  Crediting  Capital  Investment  Accounts 


212.  Debit  for  the  cost  of  capital 
assets,  including  all  expenditures  (if 
any)  until  the  time  they  become  pro- 
ductive or  ready  for  use. 


213.  Credit  for  the  cost  price  of 
the  whole  or  any  part  of  a  capital  asset 
sold  or  otherwise  disposed  of. 


Closing  Capital  Investment  Accounts 

214.     A  capital  investment  account  is  never  closed  except: 

(a)  When  the  capital  asset  is  sold  or  otherwise  disposed  of,  and 

(b)  When  the  account  contains  so  many  items  that  it  is  desirable  to 
re-state  them  in  one  total  amount,  which  is  done  by  entering  the 
balance  of  the  account  on  the  lesser  side,  footing  and  ruling  it,  and 
bringing  the  balance  down  on  the  opposite  side  as  shown  in 
illustrations  42  and  43. 


exercise  33 

J.  K.  Marston  began  business  as  a  retail  grocer  on  May  1.  His  transactions 
involving  the  purchase  of  capital  assets  are  given  below.  Record  them  in  the 
proper  accounts. 

May  1     Purchased  a  store  and  lot  at  122  Pine  Street,  the  price  of  the  store 

building  being  $4,250.00  and  of  the  lot  $2,500.00. 
1     Paid  for  examining  the  title,  recording  the  deed,  and  real  estate 

agent's  commission  for  negotiating  the  purchase,  $172.50. 
3    Purchased  furniture  and  equipment  required  to  equip  the  office 

and  store,  the  bill  amounting  to  $478.60.     Mr.  Marston  desires  to 

have  but  one  account  kept  for  both  the  office  and  store  furniture 

and  fixtures. 
9     Paid  carpenters'  bill  for  building  shelves  and  counters,  $100.00. 

These  shelves  and  counters  are  not  permanent  improvements  to 

the  building. 


94  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

11  Paid  plumber's  bill  for  repairs  and  replacements  required  to  put 
the  plumbing  in  first  class  condition,  $16.20. 

15  Mr.  Marston  opened  his  store  for  business  on  this  date,  all  altera- 
tions and  repairs  having  been  completed. 

18  He  returned  for  credit  a  single  typewriter  desk  included  with  the 
other  furniture  and  fixtures  purchased  on  May  3,  the  cost  of  which 
was  $21.50,  and  purchased  in  place  of  it  a  combination  typewriter 
and  flat-top  desk  for  $37.50  and  paid  the  difference. 

22    Paid  for  an  electric  coffee  grinding  machine,  $75.00. 

29  Sold  a  hand-operated  coffee  grinding  machine  for  $15.00,  the  cost 
of  which  was  $20.00. 

REAL  ESTATE  EXPENSE 

215.  The  real  estate  expense  account  is  kept  to  show  the  expenses  incurred 
in  maintaining  real  property.  It  is  an  expense  account  typical  of  the  kind  kept 
in  connection  with  the  investment  account  for  a  capital  asset.  As  explained  in 
paragraph  206,  the  expenses  of  maintaining  capital  assets  may  properly  be  recorded 
in  the  general  expense  account,  but  when  it  is  desired  to  separate  the  expenses 
incurred  in  maintaining  a  particular  property  from  other  expenses,  they  should 
be  recorded  in  a  special  expense  account. 

216.  The  real  estate  expense  account  is  debited  for  all  expenses  incurred  in 
maintaining  the  real  estate  owned.  It  is  credited  for  any  rebates  or  deductions 
resulting  from  overcharges  on  the  items  debited  to  the  account.  The  balance  of 
the  account  is  the  net  expense  of  maintaining  the  real  property  owned  for  a  fiscal 
period.  The  expenses  on  real  estate  used  in  a  business  are  part  of  its  general  or 
operating  expenses.  The  expenses  on  real  estate  owned  by  but  not  used  in  a 
business  are  included  in  the  group  of  accounts  designated  as  "deductions  from 
income,"  because  in  that  case  they  are  not  operating  expenses  of  the  business. 

The  following  transactions  are  properly  recorded  in  the  account  which  appears 
at  the  top  of  page  95. 

Jan.  15    Paid  tinner's  bill  for  repairing  roof  and  rain  spouts,  $6.50. 
25     Paid  plumber's  bill  for  repairing  frozen  pipe,  $2.56. 
31     Paid  city  tax  bill  for  installing  extra  water  hydrant,  $3.50. 
31     Paid  annual  premium  on  fire  insurance  policy  covering  the  store 
building,  $8.50. 

ANALYSIS 

1.  What  were  the  total  real  estate  expenses  paid  during  the  month? 

2.  What  is  the  balance  of  the  account,  and  what  does  it  represent? 

217.  To  close.  After  the  income  and  profit  and  loss  statement  has  been 
prepared,  the  real  estate  expense  account  is  closed  by  a  journal  entry  crediting 
it  for  the  amount  of  its  balance  shown  in  the  trial  balance.  The  account  may  then 
be  footed  and  ruled  as  shown  in  illustration  44. 


ELEMENTARY   ACCOUNTING 


95 


Illustration  44 


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G  i> 

REAL  ESTATE  INCOME  ACCOUNT 

218.  The  real  estate  income  account  is  kept  to  show  the  income  received 
from  real  property.  It  is  an  income  account  typical  of  the  kind  kept  in  connec- 
tion with  the  investment  and  expense  accounts  for  a  capital  asset.  Since  the  in- 
come from  real  property  is  not  a  part  of  the  principal  income  derived  from  the 
regular  income-producing  operations  of  a  business,  is  recorded  in  a  special  account 
as  explained  in  paragraph  206. 

219.  The  real  estate  income  account  is  credited  for  all  incomes  received  from 
real  property,  owned  or  rented.  It  is  debited  for  any  reductions  from  such  income. 
The  balance  of  the  account  is  the  net  income  from  real  estate  for  a  fiscal  period, 
which  is  included  in  the  group  of  accounts  designated  as  "additions  to  income." 

The  following  transactions  are  properly  recorded  in  the  account  which  appears 
below: 

Received  cash  for  rent  of  second  floor  of  the  store  building,  $22.50. 

Received  cash  for  storing  temporarily  the  surplus  stock  of  another 

merchant,  $10.00. 

Refunded  $2.50  to  the  tenant  on  the  second  floor  in  consideration 

of  his  signing  a  year's  lease  for  the  space  at  a  monthly  rental  of 

$20.00. 


Jan.    2 
20 

25 


Illustration  45 


Jan. 


To  close 


Real  Estate  Income 


= 

2 
30 

r,() 
00 

Jan. 

2 

20 

32 

50 

22  50 
JL0OO 
32  50 


•6  ACCOUNTANCY   AND    BUSINESS  MANAGEMENT 

ANALYSIS 

1.  What  was  the  total  income  from  real  estate  received  during  the  month? 

2.  .  What  was  the  net  income? 

3.  What  is  the  balance  of  the  account,  and  what  does  it  represent? 

220.  To  close.  After  the  income  and  profit  and  loss  statement  has  been 
prepared,  the  real  estate  income  account  is  closed  by  a  journal  entry  debiting  it 
for  the  amount  of  its  balance  shown  in  the  trial  balance.  The  account  may 
then  be  footed  and  ruled  as  shown  in  illustration  45. 

exercise  34 

Classify  and  record  the  following  transactions  in  the  general  expense,  real 
estate  expense,  and  real  estate  income  accounts: 

May  2     Paid  bill  for  office  supplies  and  stationery,  $8.65. 

3    Received  rent  for  offices  on  the  second  floor  of  the  store  building, 

$20.00. 
8    Paid  city  and  state  taxes  on  the  assessed  value  of  the  building  and 
lot  for  the  current  year,  $211.83. 

10     Paid  gas  and  electric  light  bill,  $9.43. 

12    Paid  carpenter's  bill  for  repairs  on  floors,  steps,  weather  stripping, 
etc.,  $18.00. 

15    Rented  a  vacant  office  on  the  second  floor  and  received  rent  for  one- 
half  month,  $6.25. 

15     Paid  salaries  and  wages  of  office  help  and  clerks,  $170.00. 

21     Paid  the  premium  on  a  fire  insurance  policy  covering  the  building, 
$12.40. 

24    Paid  advertising  bill  for  the  announcement  of  a  special  sale,  $36.00. 

28    Paid  bill  for  painting  the  front  of  the  building,  $20.00. 

31     Paid  salaries  and  wages  of  office  help  and  clerks,  $170.00. 

31     Paid  proprietor's  salary,  $175.00. 

RECORDING  TRANSACTIONS  AND  POSTING  TO  THE  LEDGER 

221.  Instruction  and  practice  in  recording  transactions  in  books  of  original 
entry,  and  in  posting  the  entries  in  such  books  to  ledger  accounts,  are  provided  in 
the  "Introduction  to  Bookkeeping"  at  the  beginning  of  this  text,  and  in  the  Elemen- 
tary Set  which  accompanies  it.  As  explained  therein,  a  book  of  original  entry  is 
any  book  which  receives  the  first  entry  of  a  transaction.  Posting  is  the  process  of 
transferring  the  debit  and  credit  items  from  books  of  original  entry  to  the  ledger. 
The  ledger  is  the  book  of  final  entry. 


ELEMENTARY   ACCOUNTING 


97 


222.  In  the  development  of  ledger  accounts  from  page  48  to  page  96  inclusive, 
debit  and  credit  items  were  entered  directly  in  the  accounts.  Original  entries  and 
posting  were  dispensed  with  in  order  to  simplify  the  presentation  of  the  principles 
involved  in  keeping  these  accounts.  The  accounts  treated  are  shown  as  they 
appear  after  the  debit  and  credit  items  are  posted  to  them  from  books  of  original 
entry.  The  process  of  recording  transactions  and  posting  to  ledger  accounts  is 
explained  and  illustrated  in  connection  with  the  model  set  in  the  Introduction  to 
Bookkeeping  beginning  on  page  12. 

TRIAL  BALANCE 

223.  After  all  entries  are  posted  to  the  ledger,  the  next  step  in  bookkeeping 
procedure  is  to  take  a  trial  balance.  A  trial  balance  is  a  list  of  open  accounts  in  the 
ledger,  with  the  balance  of  each  account  set  opposite  its  name,  showing  that  the 
sum  of  the  debit  balances  is  equal  to  the  sum  of  the  credit  balances.  Trial  balances 
are  usually  taken  on  the  last  day  of  each  month,  and  must  always  be  taken  before 
the  statements  which  show  the  results  of  the  business  transacted  for  a  fiscal  period 
are  prepared. 

The  following  trial  balance  includes  all  the  accounts  heretofore  considered 
in  this  text.  It  will  serve  as  a  basis  for  instruction  in  the  preparation  of  statements. 
Illustration  46 

Trial  Balance,  December  31,  19    .    John  Spangler        % 


Cash 

1187  52 

Merchandise  Inventory 

2736 

84 

Notes  Receivable 

578 

60 

Accounts  Receivable 

2975 

43 

Real  Estate  Investment 

7250 

00 

Furniture  and  Fixtures  Investment 

428 

75 

Notes  Payable 

3006 

86 

Accounts  Payable 

1635 

80 

John  Spangler,  Capital    - 

10000 

00 

John  Spangler,  Personal 

122 

50 

Purchases 

6278 

37 

Freight  In 

91 

72 

Warehouse  Expense 

275 

84 

Sales 

7719 

16 

General  Expense 

388 

70 

Real  Estate  Expense 

75 

16 

Real  Estate  Income 

35 

00 

Interest  Expense 

21 

72 

Interest  Income 

14 

33 

22411 

15 

22411 

15 

98  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

Explanation:  The  accounts  receivable  item  in  the  trial  balance  includes  the 
balances  of  all  personal  accounts  showing  debit  balances.  The  accounts  payable 
item  includes  the  balances  of  all  personal  accounts  showing  credit  balances.  Ac- 
counts receivable  and  accounts  payable  are  grouped  in  this  way  to  shorten  the 
trial  balance.  A  detailed  exhibit  that  includes  the  items  wrhich  make  up  the 
balance  of  an  account  in  a  trial  balance  or  statement  is  called  a  supporting  schedule. 
The  following  schedules  support  the  accounts  receivable  and  accounts  payable 
items  referred  to: 


Schedule  A — Accounts  Receivable 

Schedule  B — Accounts  Pa] 

-able 

M.  J.  Forgan 

782  91 

Piatt  &  Co. 

313  18 

Bronson  Bros. 

598  26 

James  L.  Vernon 

209  7G 

R.  C.  Nelson  &  Co. 

322  50 

Matthews  &  Kling 

778  96 

Dodd  Mercantile  Co. 

978  20 

Bell  &  Bell 

333  90 

Wilson  &  Marcott 

293  56 

Total  accounts  payable 

1635  80 

Total  accounts  receivable       2975  43 

224.  A  trial  balance  does  not  necessarily  prove  that  the  accounts  in  the 
ledger  are  correct — it  demonstrates  merely  that  the  sum  of  the  debits  is  equal  to 
the  sum  of  the  credits.  Any  one  or  more  of  the  following  errors  might  exist  in  a 
ledger  and  a  trial  balance  could  still  be  taken  from  it: 

(a)  A  debit  or  a  credit  item  posted  to  the  wrong  account;  as  for  example,  the 
posting  of  a  debit  of  $10.00  to  general  expense  instead  of  to  real  estate 
expense. 

(b)  The  posting  of  a  debit  item  to  the  credit  side  of  the  ledger  and  the 
posting  of  the  corresponding  credit  item  to  the  debit  side;  as  for  example, 
debiting  a  debtor's  personal  account  and  crediting  notes  receivable  for  a 
note  received  from  him. 

(c)  An  error  in  addition  or  subtraction  in  footing  accounts  and  finding  their 
balances,  which  is  equalized  by  a  similar  error  for  the  same  amount 
on  the  opposite  side  of  the  ledger. 

Note:    Other  errors  detected  at  the  time  the  trial  balance  is  taken  will  be  referred  to  later. 

225.  The  errors  mentioned  above  are  detected  by  a  process  called  "check- 
ing," which  consists  of  comparing  all  postings  with  the  entries  in  the  books  of 
original  entry  to  determine  whether  each  entry  has  been  correctly  posted.  All 
figures  should  be  checked  as  the  footings  and  balance  of  each  account  are  calculated. 

226.  Accounts  may  be  grouped  in  two  principal  classes:  (a)  asset,  liability, 
and  capital  accounts,  and  (b)  income  and  profit  and  loss  accounts.     The  statement 


ELEMENTARY  ACCOUNTING  99 

of  assets  and  liabilities  is  prepared  from  the  asset,  liability,  and  capital  accounts. 
The  statement  of  income  and  profit  and  loss  is  prepared  from  the  income  and  profit 
and  loss  accounts.  Accounts  showing  assets,  costs,  expenses,  and  losses  have 
debit  balances.  Accounts  showing  liabilities,  invested  capital,  incomes,  and 
profits  have  credit  balances.  Classify  mentally  the  accounts  in  the  trial  balance 
shown  in  illustration  46  under  the  two  principal  groups  named  above.  Then 
reclassify  them  according  to  whether  they  represent  assets,  liabilities,  capital, 
costs,  expenses,  losses,  incomes,  or  profits. 

INCOME  AND  PROFIT  AND  LOSS  STATEMENT 

227.  The  income  and  profit  and  loss  statement  is  prepared  at  the  close  of  each 
fiscal  period  to  exhibit  in  detail  the  results  of  the  income-producing  operations  of  a 
business,  which  are  expressed  finally  in  terms  of  net  profit  or  net  loss.  The  net 
profit  may  be  quickly  found  by  adding  the  balances  of  the  income  and  profit  and 
loss  accounts  showing  credit  balances,  and  deducting  from  the  total  the  sum  of  the 
balances  of  such  accounts  showing  debit  balances,  as  shown  by  the  following  tabula- 
tion prepared  from  the  above  trial  balance. 

Sales  7719.16 

Real  Estate  Income  35 .  00 

Interest  Income  14 .  33 

Total  credit  balances  7768.49 

Purchases  6278.37    . 

Freight  In  91.72 

Warehouse  Expense  275 .  84 

General  Expense  388.70 

Real  Estate  Expense  75. 16 

Interest  Expense  21 .  72 

Total  debit  balances  7131 .  51 

Net  Profit  636.98 

228.  An  income  and  profit  and  loss  statement,  however,  should  be  arranged 
to  exhibit  in  their  proper  relations  all  the  essential  facts  and  figures  shown  by  the 
accounts,  so  as  to  provide  the  detailed  and  properly  classified  information  that  is 
necossary  in  managing  a  business  intelligently.  The  statement  on  page  101,  show- 
ing the  same  final  result  as  the  above  tabulation,  was  prepared  from  the  same 
accounts  in  the  trial  balance,  but  includes  an  analysis  of  the  purchases  and  sales 
accounts,  which  appear  in  the  ledger  as  follows: 


100 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


Illustration  47 


Purchases 


Dec. 


1 

14 
31 


Inventory 
Cash  purchase 
Pch.  Bk.  total 

6278.37 


2276 

80 

Dec. 

5 

92 

50 

18 

6724 

11 

27 

9093 

41 

31 

Rebate 
Return 
Rebate 
Inventory 


12 

32 

33 

2736 

2815 


Sales 


Dec. 


Return 
Rebate 
Return 


23 

60 

Dec. 

9 

42 

30 

20 

45 

12 

31 

Cash  sale 
Cash  sale 
Sales  Bk.  total 


28  62 
2180 

777976 


The  preparation  of  statements  is  facilitated  when  explanations  such  as  the 
above  are  included  in  posting  to  accounts  which  must  be  analyzed  in  a  statement. 

Construction   and    Interpretation   of 
Income  and  Profit  and  Loss  Statement 

229.  This  statement  is  arranged  in  "report"  form.  It  is  divided  into  five 
sections  under  the  captions  "Income  from  Sales,"  "Cost  of  Goods  Sold,"  "Operat- 
ing Expenses,"  "Additions  to  Income,"  and  "Deductions  from  Income." 

1.  The  sales  account  is  analyzed  in  the  "income  from  sales"  section  for  the 
purpose  of  exhibiting  certain  units  of  information  that  are  not  shown  in  a  state- 
ment prepared  from  trial  balance  figures  only,  such  as  the  tabulation  on  page  99 
and  the  statement  on  page  83.  The  gross  sales  is  the  credit  footing  of  the  account. 
This  item  is  frequently  designated  as  total  sales.  The  items  under  deductions  from 
sales  are  the  returned  sales  and  rebates  and  allowances  on  sales  debited  to  the  account. 
The  difference  between  the  total  sales  and  the  sum  of  the  deductions  is  the  net 
income  from  sales,  or  balance  of  the  sales  account. 

2.  The  purchases  account  is  analyzed  in  the  "cost  of  goods  sold"  section. 
The  Inventory  of  December  1  is  the  invoice  cost  of  the  goods  which  were  on  hand 
at  the  beginning  of  the  fiscal  period  and  which  was  consequently  debited  to  the 
account  at  that  time.  To  this  inventory  is  added  the  invoice  cost  of  goods  pur- 
chased during  the  period  to  find  the  total  invoice  cost  of  merchandise  for  the  period. 
From  this  amount  is  deducted  the  invoice  cost  of  the  goods  on  hand  at  the  close 
of  the  period,  represented  by  the  credit  to  the  purchases  account  for  the  inventory 
of  December  SI,  to  find  the  total  invoice  cost  of  goods  sold  for  the  period.  It  is  evident 
that  the  invoice  cost  of  goods  sold  must  be  the  inventory  at  the  beginning  of  a 
period,  plus  the  purchases  during  the  period,  minus  the  inventory  at  the  close 
of  the  period. 


ELEMENTARY   ACCOUNTING 


101 


Illustration  48 

Income  and  Profit  and  Loss  Statement,  December  31,  19 


John  Spangler 


Income  from  Sales: 
Gross  sales 

Deductions  from  sales: 

Returns  68.72 

Rebates  and  allowances  42.30 

Net  income  from  sales 

Cost  of  Goods  Sold : 

Inventory  Dec.  1,  19    . 
Purchases  during  month 

Total  invoice  cost  of  merchandise 
Inventory  Dec.  31,  19 

Total  invoice  cost  of  goods  sold 
Deductions  from  cost: 

Returns  32.20 

Rebates  and  allowances  46.00 

Net  invoice  cost  of  goods  sold 
Additions  to  cost : 
Freight  in 
Warehouse  expense 

Total  cost  of  goods  sold 

Gross  Trading  Income 

Operating  Expenses: 

General  expense 
Real  estate  expense 

Net  Income  from  operations 

Additions  to  Income: 

Real  estate  income 
Interest  income 

Total  income  from  operations  and  all  other  sources 

Deductions  from  Income: 
Interest  expense 

Net  Profit  for  the  month 


7830 


111 


2276 
6816 


9093 
2736 


6356 

78 
6278 

91 
275 


IS 


02 


388 
75 


102  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

After  the  invoice  cost  of  goods  sold  has  been  determined,  any  deductions  from 
such  cost  for  returned  purchases  and  rebates  and  allowances  on  purchases  must  be 
subtracted  to  find  the  net  invoice  cost  of  goods  sold,  which  is  the  balance  of  the 
purchases  account.  To  this  amount  must  be  added  any  additions  to  cost  for 
trading  expenses,  such  as  freight  in  and  warehouse  expense,  to  find  the  total  cost  of  goods 
sold.  Such  expenses  are  called  trading  expenses  because  they  decrease  the  gross 
trading  profit,  since  they  must  be  included  in  the  cost  of  goods  sold. 

The  difference  between  the  net  income  from  sales  and  the  total  cost  of  goods 
sold  is  the  gross  trading  profit.  This  profit  is  frequently  referred  to  as  the  gross 
trading  income,  and  is  so  designated  in  this  statement.  It  is  the  income  derived 
directly  from  the  buying  and  selling  operations  before  any  other  incomes  have  been 
added  or  before  any  non-trading  expenses  have  been  deducted. 

3.  "Operating  expenses"  are  the  general  expenses  applicable  to  and  incurred 
by  a  business  as  a  whole  and  which  therefore  cannot  properly  be  charged  against 
any  particular  department  or  operation.  They  may  be  designated  as  non-trading 
expenses  to  distinguish  them  from  trading  expenses,  which  are  included  in  the  cost 
of  goods  sold  in  finding  the  gross  trading  income,  as  stated  in  ^[2  above.  In  other 
words,  trading  expenses  must  be  included  in  the  cost  of  goods  sold,  but  operating 
expenses  must  be  excluded  from  such  cost  and  must  be  set  up,  in  calculating  the 
net  profit,  as  one  of  the  deductions  from  gross  trading  income  after  it  has  been 
ascertained.  Operating  expenses  must  of  necessity  be  incurred  in  order  to  earn 
income  and  profits.  Some  of  them,  such  as  rent,  insurance,  and  taxes,  are  fixed 
charges;  that  is,  they  are  incurred  and  must  be  paid  regardless  of  whether  a  concern 
is  making  money  or  not.  If  earnings  are  not  sufficient  to  meet  them,  they  must 
be  paid  out  of  capital.  Other  operating  expenses,  such  as  fight,  fuel,  salaries  and 
wages,  public  service  charges,  materials  and  supplies,  etc.,  can  be  reduced  or 
eliminated  in  case  of  low  earnings,  lack  of  business,  or  temporary  suspension  of 
operations. 

The  operating  expenses  included  in  this  statement  are  the  expenses  recorded 
in  the  general  expense  and  real  estate  expense  accounts.  The  real  estate  expenses 
are  included  in  operating  expenses  because  the  real  estate  is  owned  by  and  used 
in  the  business.  If  this  real  estate,  while  owned  by  the  business  as  an  investment, 
were  not  used  in  conducting  it,  the  real  estate  expenses  would  not  be  considered  as 
operating  expenses,  but  in  such  case  would  be  included  in  "deductions  from 
income"  as  a  non-operating  expense.  The  difference  between  the  gross  trading 
income  and  total  operating  expenses  is  the  net  income  from  operations. 

4.  "Additions  to  income"  include  the  incidental  and  miscellaneous  incomes 
which  are  not  earned  by  the  regular  income-producing  operations  of  a  business. 
They  are  therefore  non-operating  incomes.  The  income  from  real  estate  is  an 
incidental  earning  resulting  from  renting  a  portion  of  the  space  in  the  building  in 


ELEMENTARY   ACCOUNTING 


103 


which  the  business  is  conducted.  As  the  investment  in  the  building  is  a  capital 
asset,  the  income  received  from  the  investment  in  the  form  of  rentals  is  a  capital 
income.  The  income  from  interest  is  likewise  an  incidental  income  which  results 
from  having  sufficient  capital  invested  to  loan  money  directly  or  indirectly  to 
debtors  temporarily.  The  sum  of  the  net  income  from  operations  and  the  addi- 
tions to  income  is  the  total  income  from  operations  and  all  other  sources. 

5.  "Deductions  from  income"  include  incidental  expenses  which  cannot 
properly  be  charged  against  the  regular  income-producing  operations  of  a  business 
as  operating  expenses  in  finding  the  net  income  from  operations.  They  are  there- 
fore non-operating  expenses.  The  interest' expense  included  under  this  heading 
represents  an  expense  that  would  not  have  been  incurred  had  sufficient  capital 
been  invested  to  pay  all  debts  and  obligations  when  they  matured.  It  represents 
the  cost  of  borrowing  money  directly  or  indirectly  with  which  to  finance  the 
business.  For  these  reasons  it  is  classified  as  a  capital  expense.  The  difference 
between  the  total  income  from  operations  and  all  other  sources  and  the  sum  of  the 
deductions  from  income  is  the  net  income  for  the  fiscal  period.  The  net  income  is 
generally  referred  to  as  the  net  profit,  and  is  so  designated  in  this  statement. 

STATEMENT  OF  ASSETS,  LIABILITIES,  AND  CAPITAL 

230.  The  assets  and  liabilities  of  a  business  and  its  financial  condition  on  a 
given  date  are  set  forth  in  the  statement  of  assets,  liabilities,  and  capital.  The 
difference  between  the  total  assets  and  total  liabilities  is  the  net  assets  when  the 
assets  are  the  larger,  or  net  liabilities  when  the  liabilities  are  the  larger.  The  net 
assets  represent  the  proprietor's  interest  or  equity  in  his  business,  and  constitute 
his  net  capital.  The  net  liabilities  are  the  excess  of  creditors'  claims  over  the 
assets  available  to  meet  them,  and  constitute  the  proprietor's  net  insolvency. 

Cash  1187.52 

Merchandise  Inventory  2736.84 

Notes  Receivable  578.60 

Accounts  Receivable  2975.43 

Real  Estate  Investment  7250.00 

Furniture  &  Fixtures  Investment  428.75 

Total  Assets  15157.14 


Notes  Payable 
Accounts  Payable 

Total  Liabilities 

Net  Assets 


3006.86 
1635.80 


4642.66 
10514.48 


104 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


231.  The  net  assets  may  be  quickly  ascertained  by  adding  the  balances  of 
the  asset  accounts,  and  deducting  from  the  total  the  sum  of  the  balances  of  the 
liability  accounts,  as  shown  by  the  tabulation  on  page  103,  which  was  prepared 
from  the  trial  balance  on  page  97. 

232.  In  a  properly  prepared  statement  of  assets,  liabilities,  and  capital, 
however,  the  assets  and  liabilities  are  exhibited  in  classified  order  in  their  proper 
relations  so  as  to  provide  all  the  units  of  information  required  to  interpret  the 
statement  correctly.  The  following  statement,  showing  the  same  final  result  as 
the  tabulation  referred  to,  was  prepared  from  the  same  accounts: 

Illustration  49 

Statement  of  Assets,  Liabilities,  and  Capital,  December  31-19    . 

John  Spangler 


1187.52 

2736.84 

578.60 

2975.43 


7250.00 
428.75 


Assets 

Current  Assets: 
Cash 

Merchandise  inventory 
Notes  receivable 
Accounts  receivable 

Total  current  assets 

Fixed  Capital  Assets: 
Real  estate  investment 
Furniture  and  fixtures  investment 

Total  fixed  capital  assets 

Total  Assets 

Liabilities 

Current  Liabilities: 
Notes  payable 
Accounts  payable 

Total  liabilities 

Net  Assets 

Capital 

John  Spangler,  Capital    %  10000.00 

Add  Net  Profit  for  December  per  I.  &  P.  &  L. 

Statement  636.98 


Deduct  John  Spangler,  Personal  % 
John  Spangler's  Net  Capital  December  31,  19 


7478 
7678 

39 
75 

15157 
4642 

3006 
1635 

86 
80 

14 

10636 
122 

98 
50 

66 

10514 
10514 

48 

IS 

elementary  accounting  105 

Construction  and  Interpretation  of 
Statement  of  Assets,  Liabilities,  and  Capital 

233.  This  statement  is  divided  into  three  sections  under  the  captions 
"Assets,"  "Liabilities,"  and  "Capital."  It  is  arranged  in  "report"  form,  which 
requires  the  assets,  liabilities,  and  capital  to  be  listed  in  the  order  named.  In 
S3tting  up  this  statement,  the  assets  are  usually  classified  or  grouped  as  current 
assets  and  fixed  capital  assets.  Liabilities  should  be  arranged  in  the  same  relative 
groups;  namely,  current  liabilities  and  fixed  liabilities.  There  are,  however,  no 
fixed  liabilities  to  be  considered  in  this  instance.  Assets  are  also  called  resources; 
hence  this  statement  is  frequently  referred  to  as  the  statement  of  resources  and 
liabilities.     It  is  sometimes  called  the  statement  of  financial  condition. 

1.  Current  assets  consist  of  cash  and  such  other  assets  as  can  be  quickly  con- 
verted into  cash  or  its  equivalent  if  necessary  to  meet  maturing  debts.  They 
are  frequently  referred  to  as  quick,  liquid,  or  floating  assets,  because  they  are 
quickly  convertible  into  cash  or  its  equivalent  and  because  they  fluctuate  con- 
tinuously in  amount  as  a  result  of  the  daily  transactions  of  a  business. 

Current  assets  should  be  listed  in  the  order  of  their  availability  to  meet  maturing 
obligations  or  convertibility  in  securing  working  cash  capital.  As  the  cash  on  hand 
is  always  immediately  available  to  pay  debts,  it  is  given  first  place  in  the  statement. 
The  merchandise  inventory  is  given  second  place  because  the  stock  in  trade  is 
continuously  being  converted  into  cash  as  goods  are  sold,  and  for  the  further  reason 
that  loans  for  a  considerable  part  of  the  present  market  value  of  the  goods  on 
hand  can  usually  be  negotiated  at  bank  when  the  stock  in  trade  is  offered  as 
security.  Notes  receivable  are  listed  next  because  they  are  short-time  contracts 
to  pay  at  a  specified  date,  and  because  they  can  usually  be  readily  discounted  at 
bank  if  the  notes  are  made  and  endorsed  by  responsible  parties.  Debtors'  ac- 
counts receivable  are  listed  next  because  they  are  usually  short-time  debts  based 
upon  implied  promises  to  pay  at  the  expiration  of  the  term  of  credit,  and  can 
ordinarily  be  collected  sooner  if  a  sufficient  inducement  in  the  way  of  a  cash  discount 
is  offered  for  prepayment.  They  can  also  be  offered  to  banks  as  security  for  loans 
for  a  part  of  their  book  value  if  they  are  "good"  accounts.  They  may  also  be 
sold  at  a  discount  to  concerns  which  make  a  business  of  buying  accounts  receivable 
from  business  men  who  are  in  need  of  funds.  These  concerns  collect  the  accounts 
they  buy  at  their  book  value  at  maturity,  and  their  profit  is  the  difference  between 
the  book  value  and  the  discounted  value  at  which  they  were  purchased.  These 
concerns,  however,  charge  back  any  part  of  an  account  which  cannot  be  collected 
to  the  party  from  whom  it  was  purchased.  Accounts  receivable  that  are  past  due 
and  which  therefore  may  not  be  collected  should  not  be  listed  as  current  assets 
with  such  other  accounts  receivable  as  are  not  yet  due,  but  should  be  included  in 
the  statement  as  "Doubtful  Accounts  Receivable"  under  the  caption  "Other 
Assets." 


106  ACCOUNTANCY  AND    BUSINESS   MANAGEMENT 

Fixed  capital  assets  are  the  permanent  investments  in  the  various  kinds  of 
property  and  equipment  required  in  conducting  a  business.  They  are  to  be 
distinguished  from  investments  in  stock  in  trade  and  such  other  assets  that  are 
purchased  to  be  sold  at  a  profit.  As  a  rule  they  are  the  kind  of  assets  in  which 
some  part  of  the  capital  of  a  concern  must  first  be  invested  before  the  income- 
producing  operations  can  be  started  or  maintained.  They  do  not  fluctuate  in 
amount  as  a  result  of  daily  routine  transactions  and  cannot  be  as  readily  converted 
into  cash  as  current  assets.  However,  because  of  their  status  as  permanent 
investments  in  tangible  real  or  personal  property,  most  of  them  can  be  pledged  as 
security  for  long-time  loans  when  funds  are  borrowed  to  finance  current  obliga- 
tions, new  operations,  or  permanent  improvements  and  betterments.  Fixed 
capital  assets  are  usually  listed  in  the  order  of  their  importance  and  permanence 
as  investments,  the  largest  being  listed  first. 

2.  Liabilities  should  be  grouped  in  the  same  relative  order  as  assets.  When 
current  assets  are  stated  first  among  the  assets,  current  liabilities  should  be  fisted 
first  among  the  liabilities.  Current  liabilities  are  the  obligations  and  debts  which 
will  mature  and  be  payable  in  the  near  future,  and  thus  as  a  rule  represent  the 
first  claims  upon  assets.  Careful  management  requires  that  care  be  taken  at  all 
times  to  have  sufficient  current  assets  available  to  pay  current  liabilities  as  they 
mature,  in  order  to  keep  the  credit  of  a  concern  unimpaired. 

Current  liabilities  should  be  fisted  in  the  order  in  which  they  will  have  to  be 
liquidated.  Notes  payable  are  listed  first  because  they  are  usually  short-time 
written  promises  or  contracts  to  pay  on  definitely  specified  dates.  Accounts  payable 
are  listed  next  because  they  are  usually  short-time  debts  based  upon  implied 
promises  to  pay  at  the  expiration  of  the  term  of  credit.  As  previously  stated, 
there  are  no  fixed  liabilities  in  this  statement.  The  long-time  loans  referred  to 
above  in  connection  with  fixed  capital  assets,  such  as  mortgages  on  real  estate 
and  bonded  indebtedness,  are  examples  of  fixed  liabilities. 

3.  The  capital  of  a  business  at  a  given  date  is  its  owner's  net  assets  invested 
therein.  The  net  assets  are  the  total  assets  minus  the  total  liabilities.  The  net 
assets  are  equal  to  the  proprietor's  capital  investment  at  the  beginning  of  a  given 
period  plus  the  profit  or  minus  the  loss  for  the  period,  and  plus  or  minus  the  balance 
(if  any)  of  the  proprietor's  personal  account,  which  is  usually  closed  into  the 
capital  account  at  the  close  of  the  period. 

Mr.  Spangler's  income  and  profit  and  loss  statement  shows  that  he  has  made 
a  profit  of  $636.98.  His  wealth  has  been  increased  by  the  amount  of  this  profit. 
Any  part  of  the  net  profit  may  be  withdrawn,  or  it  may  be  allowed  to  remain  in 
the  business  as  an  addition  to  invested  capital.  If  Mr.  Spangler  had  allowed  his 
entire  profit  to  remain  in  his  business,  his  invested  capital  would  have  been  increased 
by  the  amount  of  the  profit.     If  he  had  withdrawn  all  of  the  profit,  his  invested 


ELEMENTARY   ACCOUNTING 


107 


capital  would  have  remained  unchanged,  because  in  that  case  the  profit  would 
no  longer  have  been  included  in  the  assets  of  his  business. 

Mr.  Spangler's  books  show  that  during  the  month  there  were  paid  out  in 
settlement  of  his  personal  debts  sums  amounting  to  $122.50,  which  were  charged 
to  his  personal  account.  Such  items  are  to  be  regarded  as  withdrawals  of  profit 
made  prior  to  the  date  on  which  the  net  profit  is  ascertained.  The  difference 
between  $636.98  and  $122.50,  or  $514.48,  is  the  amount  of  the  profit  yet  to  be 
disposed  of  in  the  final  adjustment  of  his  accounts  for  this  period.  Mr.  Spangler 
desires  to  have  it  credited  to  his  capital  account  as  an  addition  to  invested  capital. 
This  disposition  and  adjustment  of  his  profit  is  provided  for  in  the  capital  section 
of  the  statement  of  assets  and  liabilities. 

The  proprietorship  interest  in  a  business,  as  set  forth  in  the  statement  of 
assets  and  liabilities,  may  therefore  be  stated  in  the  form  of  an  equation  as  follows: 

Assets  —  Liabilities  =  Capital 

In  the  ledger,  however,  assets  are  debits  and  liabilities  are  credits,  because  the 
only  way  to  distinguish  between  them  in  keeping  books  by'  double  entry  is  to 
record  them  on  opposite  sides  of  their  respective  ledger  accounts.  No  provision 
is  made  in  double  entry  bookkeeping  for  the  usual  method  of  subtracting  one  item 
from  another  as  required  in  the  above  equation.  The  only  way  to  secure  a  sub- 
traction in  the  ledger  is  to  record  the  item  to  be  subtracted  on  the  opposite  side  of 
either  the  same  or  another  account.  For  example,  the  credit  items  in  debtors' 
accounts  are  subtractions  from  debit  items.  Likewise,  the  debit  items  in  creditors' 
accounts  are  subtractions  from  credit  items.  Hence,  transposing  the  negative 
quantity  in  the  above  equation  gives  a  new  equation  which  states  the  proprietor- 
ship interest  in  ledger  form,  thus: 


,  Assets  =  Liabilities  +  Capital 


Substituting  the  total  assets,  total  liabilities,  and  n^t  capital,  as  shown  in  the 
statement  of  assets  and  liabilities,  for  the  members  of  the  above  equation,  we 
have  the  following: 


Total  Assets 


15157.14 


15157.14 


Total  Liabilities 
Capital 


4642.66 
10514.48 
15157.14 


Since  in  double  entry  bookkeeping  an  equality  of  debits  and  credits  is  to  be 
maintained,  and  further,  since  assets  are  debits  and  liabilities  are  credits,  it  follows 
that  capital  must  be  treated  as  a  credit  for  bookkeeping  purposes.  It  is  erroneous, 
however,  to  reason  that  since  capital  is  a  credit  it  is  in  any  sense  a  liability  of  its 


108 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


owner  or  of  the  business  in  which  he  invested  it,  or  that  the  business  owes  the 
proprietor  the  amount  of  the  capital  invested.  Since  an  owner  owns  his  business 
he  cannot  be  owed  for  something  which  already  belongs  to  him.  The  credit  balance 
of  Ins  capital  account  merely  shows  the  excess  of  his  assets  over  his  liabilities,  and 
represents  his  interest  or  equity  in  his  assets.  His  liabilities  represent  the  claims 
held  by  his  creditors  against  his  assets.  If  he  has  no  liabilities  he  is  the  sole  owner 
of  his  assets,  and  the  balance  of  his  capital  account  will  be  equal  to  the  sum  of 
his  assets.  It  stands  as  a  credit  in  the  ledger  as  an  offsetting  or  balancing  item 
against  the  assets  appearing  on  the  debit  side. 

The  accounting  practice  of  treating  assets  as  debits,  and  liabilities  and 
capital  as  credits,  is  the  equivalent  of  crediting  a  proprietor  in  his  capital  account 
for  his  assets  and  debiting  him  for  his  liabilities,  thus: 

Assets 


Total  assets 


15157.14 

Liabilities 


I     Total  liabilities 
John  Spangler,  Capital 


4642.66 


Total  liabilities 


4642.66 


Total  assets 


15157.14 


The  capital  account  as  now  set  up  above  shows  the  same  balance  as  it  would  if 
the  proprietor  were  credited  with  his  net  assets,  or  the  difference  between  his  total 
assets  and  total  liabilities,  thus: 

John  Spangler,  Capital 


Net  assets 


10514.48 


A  trial  balance  of  the  above  ledger  accounts  therefore  ^hows: 


Assets 

Liabilities 

John  Spangler,  Capital 


15157 


15157 


1-1 


11 


4642 
10514 


48 


1515714 


Reconciliation  of  Income  and  Profit  and  Loss  Statement  With 
Statement  of  Assets,  Liabilities,  and  Capital 

234.  The  net  profit  or  net  loss  for  a  fiscal  period  can  be  determined  b}'  taking 
the  difference  between  the  net  capital  at  the  beginning  and  the  net  capital  at  the 
close  of  the  period.     If  the  net  capital  at  the  close  of  the  period  is  the  larger,  th« 


ELEMENTARY   ACCOUNTING  109 

difference  is  the  net  profit.  If  it  is  less  than  the  net  capital  at  the  beginning  of  the 
period,  the  difference  is  the  net  loss.  Stated  in  another  way,  since  the  net  capital 
of  a  business  is  its  net  assets,  the  amount  of  the  increase  in  net  assets  during  the 
period  is  the  net  profit,  or  the  amount  of  the  decrease  is  the  net  loss.  The  follow- 
ing tabulation  shows  how  the  final  results  in  the  income  and  profit  and  loss 
statement  and  statement  of  assets  and  liabilities  are  reconciled  in  proving  the 
correctness  of  the  net  profit: 

Net  capital  at  close  of  period  10514.48 

Net  capital  at  beginning  of  period  10000.00 

Profit  credited  to  capital  account  of  proprietor  514.48 

Profit  withdrawn  during  period  and  charged  to  pro- 
prietor's personal  account.  122 .  50 
Net  profit  shown  by  income  and  profit  and  loss  statement.      636 .  98 

CLOSING  THE  BOOKS 

235.  It  is  the  best  practice  to  post  daily  all  current  entries  in  the  books  of 
original  entry  and  to  post  the  totals  of  the  books  at  the  end  of  the  month,  after 
which  they  may  be  ruled  and  closed  for  the  month.  In  order  to  make  a  periodical 
test  of  the  equality  of  debits  and  credits  in  the  ledger,  it  is  customary  to  take  a 
trial  balance  at  the  end  of  each  month.  By  doing  so,  errors  in  original  entries  or  in 
posting  may  be  detected  and  corrected  promptly. 

236.  As  a  rule  it  is  customary  to  prepare  statements  "and  ascertain  the  net 
profit  or  loss  and  the  financial  condition  of  a  business  annually  at  the  end  of  each 
fiscal  period,  although  in  some  instances  they  are  prepared  semi-annually,  quarterly, 
or  even  monthly.  The  ledger  should  be  closed  at  the  end  of  each  fiscal  period, 
after  the  annual  statements  have  been  prepared,  for  the  following  purposes: 

(a)  To  indicate  the  end  of  an  accounting  or  fiscal  period. 

(b)  To  close  the  current  income  and  profit  and  loss  accounts  and  thus 
eliminate  them  as  open  accounts  in  the  ledger  so  as  to  prepare  them  to 
receive  entries  for  the  next  fiscal  period. 

(c)  To  record  the  final  distribution  of  the  net  profit  or  net  loss  in  the  proper 
ledger  accounts  in  accordance  with  the  directions  of  the  proprietor,  and 

(d)  To  close  the  proprietor's  capital  account  for  the  current  period  and  to 
reopen  it  for  the  amount  of  the  capital  invested  at  the  beginning  of  the 
next  fiscal  period. 

237.  It  is  the  function  of  the  income  and  profit  and  loss  accounts  to  supply 
the  classified  data  from  which  to  ascertain  the  net  profit  or  the  net  loss  for  each 
fiscal  period.  The  various  elements  of  cost,  expense,  loss,  income,  and  profit 
shown  by  these  accounts  are  summarized  in  the  income  and  profit  and  loss  state- 


110  ACCOUNTANCY   AND    BUSINESS    MANAGEMENT 

ment  and  are  therein  reduced  to  the  single  result  of  net  profit  or  net  loss.  The 
income  and  profit  and  loss  accounts  should  therefore  be  closed,  or  "written  off  the 
books,"  after  the  statement  referred  to  has  been  prepared.  These  accounts  are 
frequently  referred  to  as  fiscal  accounts  because  they  are  opened  at  the  beginning 
and  closed  at  the  end  of  each  fiscal  period. 

238.  On  the  other  hand,  asset  and  liability  accounts  are  not  closed  because 
their  function  is  to  show  at  all  times,  regardless  of  fiscal  periods,  the  amounts  of 
the  various  assets  and  liabilities.  They  are  continuing  accounts,  showing  the 
assets  and  liabilities  not  only  at  the  close  of  one  accounting  period,  but  also  at  the 
beginning  of  the  next  period  and  during  that  and  succeeding  periods,  until  the 
assets  are  finally  disposed  of  or  the  liabilities  are  paid. 

Closing  and  Adjusting  Entries 

239.  The  closing  of  the  ledger  is  accomplished  by  means  of  certain  closing  and 
adjusting  entries  made  in  the  journal,  which,  when  posted,  will  balance  and  thus 
close  out  all  accounts  in  the  ledger  except  the  asset,  liability,  and  capital  accounts. 
These  entries  summarize  in  one  account  all  the  income  and  profit  and  loss 
accounts  in  substantially  the  same  manner  in  which  they  are  summarized  in  the 
income  and  profit  and  loss  statement.  This  account  is  called  the  Profit  and  Loss 
Summary.  It  is  set  up  by  transfer  entries  which  close  the  balances  of  the  various 
income  and  profit  and  loss  accounts  into  it,  with  the  result  that  its  balance  is  the 
net  profit  or  net  loss  snown  on  the  statement.  The  balance  of  the  profit  and  loss 
summary  is  closed  into  the  proprietor's  capital  account.  The  balance  of  his 
personal  account  is  then  closed  into  his  capital  account  inmost  instances.  Read 
1fl05.  The  closing  and  adjusting  entries  referred  to  are  prepared  from  the  trial 
balance  and  statements. 

240.  The  debits  and  credits  in  an  account  must  be  equal  before  it  can  be 
closed.  If  an  account  shows  a  debit  balance,  it  must  be  credited  for  the  amount  of 
its  balance  to  close  it;  and  likewise,  if  it  shows  a  credit  balance  it  must  be  debited 
for  the  amount  of  its  balance.  The  income  and  profit  and  loss  accounts  can  thus 
be  closed  by  journal  entries  which  transfer  their  balances  to  the  profit  and  loss 
summary  account.  The  entries  in  the  journal  on  page  111  set  up  the  profit 
and  loss  summary  account  in  Mr.  Spangler's  ledger,  and  close  the  income  and 
profit  and  loss  accounts  included  in  his  trial  balance  on  page  97. 

241.  Illustration  51  shows  the  income  and  profit  and  loss  accounts  and  the 
profit  and  loss  summary  account  in  Mr.  Spangler's  ledger  after  the  transfer  and 
closing  entries  referred  to  have  been  posted.  Notice  that  all  of  the  income  and  profit 
and  loss  accounts  are  footed  and  ruled  to  show  that  they  are  closed,  and  that  the 
profit  and  loss  summary  has  a  credit  balance  equal  to  the  amount  of  the  net  profit 
shown  by  the  income  and  profit  and  loss  statement.    These  entries  have  therefore 


ELEMENTARY   ACCOUNTING 


111 


Illustration  50 


Journal,  December  31,  19 


Sales 

Profit  &  Loss  Summary 

To  close   sales   account   and   transfer  income 
from  sales  to  the  P.  &  L.  Summary 
31 
Real  Estate  Income 

Profit  &  Loss  Summary 

To  close  real  estate  income  account  and  trans- 
fer its  balance  to  P.  &  L.  Summary 
31 
Interest  Income 

Profit  &  Loss  Summary 

To  close  interest  income  account  and  transfer 
its  balance  to  P.  &  L.  Summary 
31 
Profit  &  Loss  Summary 
Purchases 

To  close  purchases    account    and  transfer  cost 
of  goods  sold  to  P.  &  L.  Summary 
31 
Profit  &  Loss  Summary 
Freight  In 

To  close    freight    in    account   and  transfer  its 
balance  to  P.  &  L.  Summary 
31 
Profit  &  Loss  Summary 
Warehouse  Expense 

To  close  warehouse  expense  account  and  trans- 
fer its  balance  to  P.  &  L.  Summary 
31 
Profit  &  Loss  Summary 
General  Expense 

To  close  general  expense  account  and  close  its 
balance  into  P.  &  L.  Summary 
31 
Profit  &  Loss  Summary 
Real  Estate  Expense 

To  close  real  estate  expense  account  and  close 
its  balance  into  P.  &  L.  Summary 
31 
Profit  &  Loss  Summary 
Interest  Expense 

To  close  interest  expense  account  and  transfer 
its  balance  to  P.  &  L.  Summary 


7719 


10 


35 


1-1 


6278 


91 


275 


3SS 


75 


21 


(10 


33 


37 


72 


84 


70 


16 


72 


7719 


35 


11 


6278 


91 


275 


3S8 


75 


21 


16 


00 


33 


37 


72 


SI 


70 


16 


72 


112 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


resulted  finally  in  recording  the  net  profit  on  the  books  as  a  credit  to  the  profit  and 
loss  summary. 

242.  The  profit  and  loss  summary  contains  exactly  the  same  data  as  the 
tabulation  showing  the  net  profit  which  appears  on  page  99.  In  the  tabulation 
the  sum  of  the  costs,  expenses,  and  losses  is  deducted  from  the  sum  of  the  incomes 
and  profits,  while  in  the  summary  account  the  costs,  expenses,  and  losses  are 
debits,  and  the  incomes  and  profits  are  credits.  In  other  words,  the  profit  and 
loss  summary  is  an  abbreviated  or  condensed  income  and  profit  and  loss  statement 
in  ledger  form. 
Illustration  51 

purchases 


Dec. 


1 
14 

31 


Inventory 
Cash  purchase 
Pch.  Bk.  total 


2276 

80 

Dec. 

5 

92 

50 

18 

6724 

11 

27 
31 
31 

9093 

41 

Rebate 
Return 
Rebate 
Inventory 
To  close 


Freight  In 


12 

32 

33 

2736 

6278 


9093 


Dec. 


Freight 
Express 
Freight 
Drayage 


22 

16 

Dec. 

21 

9 

37 

31 

39 

15 

24 

50 

95 

18 

Frt.  rebate 
To  close 


Warehouse  Expense 


85 


IS 


Dec. 


12 
31 


Supplies 
Wages 


95  84 
180  00 


275 


84 


To  close 


Sales 


275 


275 


84 


84 


Dec. 


Return 
Rebate 
Return 
To  close 


23 

60 

Dec. 

9 

42 

30 

20 

45 

12 

31 

7719 

16 

7830 

18 



Cash  sale 
Cash  sale 
Sales  Bk.  total 


2862 
2180 


7779 


7830 


70 


IS 


elementary  accounting 
General  Expense 


Dec. 


4 
15 
31 


Coal 

Office  supplies 

Salaries 


To  close 


Real  Estate  Expense 


113 


388 


388 


70 


70 


Dec. 


Dec. 


12 

20 


Taxes 
Repairs 


31 


To  close 


52 
22 

42 

74 

Dec. 

31 

75 

16 

To  close 


Real  Estate  Income 


Interest  Expense 


7516 


75 


10 


35 

00 

Dec. 

10 
31 

Rent 
Rent 

1000 
25|00 

35 

00 

35  00 

— 

1 

Dec. 


12 

21 


Interest 
Discount 


13 


21 


72 


Dec. 


31 


To  close 


Interest  Income 


21 


21 


72 


72 


Dec.       31     To  close 


Interest 
Interest 


Profit  and  Loss  Summary 


321 
11  12 

14:33 


Dec. 


Purchases 
Freight  In 
Ware.  Expense 
Gen.  Expense 
R.  E.  Expense 
Int.  Expense 


6278 

37 

Dec. 

31 

91 

72 

31 

275 

84 

31 

388 

70 

75 

16 

21 

72 

7131 

51 

Sales 

R.  E.  Income 

Int.  Income 

636.98 


771916 
35  00 
1433 


77t 


40 


114 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


243.  The  profit  and  loss  summary  now  stands  open  in  the  ledger  with  a 
credit  balance  equal  to  the  amount  of  the  net  profit.  The  next  step  in  the  process 
of  closing  the  ledger  is  to  transfer  this  balance,  which  is  the  net  profit,  to  the  capital 
account  of  the  proprietor.  The  following  journal  entry  will  therefore  close  the 
profit  and  loss  summary  into  Mr.  Spangler's  capital  account: 
Illustration  52 

31 

Profit  &  Loss  Summary  636  98 

John  Spangler,  Capital  636  98 

To  close  P.  &  L.  Summary  and  credit  pro- 
prietor's capital  account  for  net  profit  shown 
on  I.  &  P.  &  L.  Statement,  Dec.  31,  19    . 

When  the  above  entry  is  posted,  the  summary  account,  after  being  footed  and 
ruled,  and  the  capital  account  will  appear  as  follows: 


Illustration  53 


Profit  and  Loss  Summary 


Dec. 


Purchases 
Freight  In 
Ware.  Expense 
Gen.  Expense 
R.  E.  Expense 
Int.  Expense 
J.  Spangler,  Cap. 


6278 

37 

Dec. 

31 

19 

72 

31 

275 

84 

31 

388 

70 

75 

16 

21 

72 

636 

98 

7768 

49 

" 

Sales 

R.  E.  Income 

Int.  Income 


7719 
35 
14 


7768  49 


John  Spangler,  Capital 


Dec. 


Investment 
Net  profit 


10000  00 
636  98 


244.  After  the  net  profit  is  carried  to  the  credit  of  the  capital  account,  the 
next  step  in  the  closing  process  is  to  make  such  final  adjustment  of  the  owner's 
personal  account  as  he  may  direct.  The  personal  account  may  be  closed  into 
the  capital  account,  it  may  be  allowed  to  stand  as  an  open  account  for  future  adjust- 
ment, it  may  be  credited  with  such  part  of  the  net  profit  as  is  required  to  close  it, 
or  with  such  part  of  the  net  profit  as  the  proprietor  may  elect  to  withdraw.  In 
any  case,  that  part  of  the  net  profit  not  withdrawn  or  applied  against  the  debit 
balance  of  the  owner's  personal  account  remains  as  a  credit  in  his  capital  account 
as  an  addition  to  invested  capital.     In  case  the  owner  has  a  credit  balance  in  his 


ELEMENTARY  ACCOUNTING 


115 


personal  account,  it  may  be  closed  by  transferring  the  balance  to  his  capital 
account  as  an  additional  investment,  by  withdrawing  the  amount  of  the  balance 
in  cash  or  some  other  asset,  or  by  charging  it,  in  the  case  of  a  net  loss,  with  that 
part  of  the  loss  required  to  close  it. 

245.     In  Mr.  Spangler's  case,  he  has  decided  to  credit  his  personal  account 
with  such  part  of  the  net  profit  as  is  required  to  close  it,  and  to  allow  the  remainder 
of  the  net  profit  to  remain  in  his  business  as  an  addition  to  invested  capital.    This 
adjustment  is  made  by  the  following  journal  entry: 
Illustration  54 

31 


John  Spangler,  Capital  122J50 

John  Spangler,  Personal  122  50 

To  close  balance  of  personal  account  and  credit 
capital  account  with  that  part  of  net  profit 
invested. 


After  the  above  entry  is  posted,  the  personal  account,  after  being  footed  and  ruled, 
and  the  capital  account  will  appear  as  follows: 
Illustration  55 


John  Spangler,  Personal 

Dec. 

1 
4 

House  rent 
Coal 

75 
47 

00 
50 

Dec. 

31 

Capital  a/c 

122 

50 

122 

50 

122 

50 

John  Spangler,  Capital 


Dec. 


81 


Personal  a/c 


122 


60 


Dec. 


Investment 
Invested  profit 


10000  00 
636  98 


246.  The  process  of  closing  the  ledger  is  completed  when  the  final  distribution 
of  the  net  profit  or  net  loss  is  recorded  in  the  ledger  and  the  accounts  are  footed 
and  ruled.  It  is  customary,  however,  to  "balance"  the  proprietor's  capital 
account  in  order  to  restate  his  present  invested  capital,  or  net  capital,  in  one 
amount.  This  is  done  by  entering  the  credit  balance  on  the  debit  side,  footing 
and  ruling  the  account,  and  bringing  the  balance  down  on  the  credit  side  under 
date  of  the  next  business  day,  as  illustrated  on  the  next  page.     Read  214b. 


116 


ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 


Illustration  56 


John  Spangler,  Capital 


Dec. 


31 
L  31 


Personal  a/c 
Net  Capital 


122  50 
1051448 

Dec. 

1 
31 

1 

10636|98 

Jan. 

Investment 
Net  profit 


Net  Capital 


10000  00 
636  98 


10636  98 


1051448 


247.  Observe  that  a  journal  entry  is  not  required  in  balancing  an  account  in 
the  manner  described  in  ^[246.  An  account  is  balanced  by  a  cross  entry  within  the 
account  itself — a  credit  above  the  ruling  and  a  debit  below,  or  vice  versa.  It  is 
stated  in  ^[238  that  asset  and  liability  accounts  are  not  closed.  They  may  be 
balanced,  however,  at  the  close  of  each  fiscal  period,  in  the  manner  described  above, 
if  it  is  preferred  to  do  so.  As  a  rule  it  is  customary  not  to  balance  them  until  it  is 
necessary  to  forward  them  to  new  pages  in  the  ledger.  Illustrations  42  and  43  on 
page  92  show  howsuch  accounts  may  be  balanced. 

Compound  Journal  Entry  to  Close 

248.  The  process  of  closing  the  ledger  may  be  considerably  simplified  and 
shortened  if  the  profit  and  loss  summary  account  is  not  opened.  If  the  debits  and 
credits  to  the  profit  and  loss  summary  included  in  illustrations  51  and  53  are 
omitted  and  the  remaining  debits  and  credits  in  these  entries  are  combined  in 
one  entry,  a  compound  journal  entry  will  result  which  will  include: 

(a)  all  the  debits  and  credits  required  to  close  the  income  and  profit  and 
loss  accounts,  and 

(b)  a  credit  to  the  proprietor's  capital  account  for  the  amount  of  the  net 
profit,  thus: 

Illustration  57 

Journal,  December  31,  19    . 


Sales 

To  close 

7719 

16 

Real  Estate  Income 

it             M 

35 

00 

Interest  Income 

«         a 

14 

33 

Purchases 

«         « 

6278 

37 

Freight  In 

«         « 

91 

72 

Warehouse  Expense 

a         « 

275  84 

General  Expense 

«         «< 

38870 

Real  Estate  Expense 

«         « 

7516 

Interest  Expense 

M            « 

21 

72 

John  Spangler,  Capital 

Net  profit  for  December 

636 

98 

ELEMENTARY   ACCOUNTING 


117 


249.  In  order  to  complete  the  closing  of  the  ledger,  a  second  entry  adjusting 
the  proprietor's  personal  account  is  required.  This  entry  is  shown  in  illustration 
54.  The  method  to  be  followed  in  closing  the  ledger  is  largely  a  matter  of  individual 
preference.  Those  who  close  by  the  first  method  illustrated  prefer  it  because 
they  wish  to  group  all  the  elements  of  profit  and  loss  in  one  account  in  the  ledger. 
This  method  is  to  be  preferred  principally  because  it  supplies  a  record  in  the 
ledger  of  all  the  amounts  entering  into  annual  net  profits  or  losses  from  year  to  year 
that  can  be  checked  up  easily  when  books  are  audited  for  income  tax  purposes. 
Those  who  use  the  compound  journal  entry  claim  that  the  profit  and  loss  summary 
account  in  the  ledger  is  useless  because  the  income  and  profit  and  loss  statement 
contains  the  same  information  in  greater  detail,  and  consequently  the  compound 
entry  is  to  be  preferred  because  of  its  brevity. 


Exercise  35 

From  the  following  trial  balance  and  other  data,  prepare  an  income  and  profit 
and  loss  statement,  a  statement  of  assets,  liabilities,  and  capital,  and  the  closing 
and  adjusting  entries  required  to  close  the  ledger.  Set  up  the  profit  and  loss 
summary  account.  The  proprietor's  capital  account  is  to  be  credited  with  the 
net  profit,  and  his  personal  account  is  to  be  closed  into  his  capital  account. 

Trial  Balance,  December  31,  19     .    J.  M.  Warren 


Cash 

2460  20 

Inventory 

3647 

19 

Notes  Receivable 

2214 

45 

Accounts  Receivable 

3114 

34 

Real  Estate  Investment 

5215 

90 

• 

Furniture  &  Fixtures  Investment 

322 

40 

Notes  Payable 

4629 

45 

Accounts  Payable 

3514 

26 

J.  M.  Warren,  Capital 

8246 

51 

J.  M.  Warren,  Personal 

19 

16 

Purchases 

10725 

04 

Freight  In 

578 

82 

Warehouse  Expense 

1621 

93 

Sales 

15746 

21 

General  Expense 

2225 

42 

Real  Estate  Expense 

328 

72 

Real  Estate  Income 

447 

60 

Interest  Expense 

129 

67 

Interest  Income 

24 

19 

21 

32M3 

32603 

24 

118 


ACCOUNTANCY   AND   BUSINESS   MANAGEMENT 


Additional  Data  Required  for  Income  and  Profit  and  Loss  Statement 

Inventory  January  1,  $2378.82;  returned  purchases,  $113.26;  rebates  and 
allowances  on  purchases,  $212.63;  total  purchases,  $12319.30. 

Gross  Sales,  $16246.53;  returned  sales,  $328.42;  sales  rebates  and  allowances, 
$171.90. 

Exercise  36 

Prepare  statements  and  a  compound  journal  entry  to  close  from  the  following 
trial  balance  and  other  data.  The  net  profit  or  loss  is  to  be  recorded  in  the  pro- 
prietor's personal  account,  the  balance  of  which  is  not  to  be  closed  into  the  capital 
account  because  the  proprietor  intends  to  withraw  whatever  sum  stands  to  his 
credit  in  his  personal  account  after  final  results  are  determined. 

Trial  Balance,  December  31,  19     .    F.  B.  Clarke 


F.  B.  Clarke,  Capital 

Green  Spring  Farm  Investment 

Notes  Payable 

Store  and  Lot  Investment 

Notes  Receivable 

Accounts  Payable 

Inventory 

Accounts  Receivable 

Mortgage  Payable 

Purchases 

Farm  Expense 

Store  Expense 

Freight  In 

Interest  Income 

Sales 

Farm  Income 

Store  Income 

Furniture  and  Fixtures  Investment 

General  Expense 

Interest  Expense 

Cash 

Warehouse  Expense 

F.  B.  Clarke,  Personal 


10296 

50 

2092 

60 

2793 

14 

6245 

00 

2312 

62 

2191 

26 

3225 

06 

2515 

20 

3000 

00 

12593 

55 

750 

59 

225 

62 

628 

31 

33 

78 

16672 

95 

875 

15 

540 

00 

529 

70 

2526 

30 

125 

80 

1454 

24 

1428 

19 

250  00 

36652 

78 

36652|78 

Additional  Data  Required  for   Income  and  Profit  and  Loss  Statement 

Inventory  January  1,  $1972.80;  total  purchases,  $14134.77;  returned  pur- 
chases, $173.14;  purchase  rebates  and  allowances,  $90.22;  goods  donated 
to. charity  at  invoice  cost,  $25.60. 


ELEMENTARY   ACCOUNTING  119 

Gross  sales,  $16894.36;  returned  sales,  $125.19;  sales  rebates  and  allowances, 
$96.22. 

RECAPITULATION  OF  PRINCIPLES 

A  review  of  the  subject  matter  of  Part  One,  which  should  be  made  the  basis  of  a  series  of  very  thorough  class 
drills  and  recitations. 

1.  Bookkeeping  is  the  art  of  classifying  and  recording  business  transactions 
and  facts  systematically. 

2.  Accountancy  is  the  science  which  treats  of  the  methods  of  classifying 
business  transactions  and  accounts  so  that  the  facts  they  exhibit  shall  be  shown  in 
their  proper  relations,  expressed  in  terms  that  will  most  fully  provide  the  informa- 
tion necessaiy  to  successful  business  and  financial  administration. 

3.  The  two  principal  objects  of  accounting  are:  (a)  to  determine  at  stated 
intervals  the  financial  condition  of  an  enterprise,  and  (b)  to  determine  at  stated 
intervals  the  net  profit  or  loss  resulting  from  conducting  the  enterprise. 

4.  Accounts  are  grouped  in  two  principal  classes:  (a)  asset,  liability,  and 
capital  accounts,  and  (b)  income  and  profit  and  loss  accounts. 

5.  It  is  the  function  of  the  statement  of  assets  and  liabilities  to  exhibit  in 
complete  detail  the  financial  condition  of  an  enterprise  as  reflected  by  the  relative 
condition  and  amounts  of  its  various  assets  and  Labilities,  and  invested  capital. 

6.  The  function  of  the  income  and  profit  and  loss  statement  is  to  exhibit  in 
their  proper  relations  and  in  complete  detail  the  sources  and  amounts  of  all  costs, 
returns,  expenses,  incomes,  losses,  and  profits  which  enter  into  the  determination 
of  the  net  profit  or  net  loss  for  a  fiscal  period. 

7.  The  invested  capital  of  an  enterprise  is  its  net  assets,  which  consist  of  the 
difference  between  its  total  assets  and  its  total  liabilities. 

8.  In  an  accounting  sense,  assets  include  all  real  and  tangible  personal 
property,  the  rights  to  such  property,  and  claims  against  debtors. 

9.  Current  assets  consist  of  cash  and  such  other  quick,  liquid,  or  floating 
assets  as  in  the  usual  course  of  business  can  readily  be  converted  into  cash  or  its 
equivalent  if  necessary  to  meet  maturing  debts. 

10.  Fixed  capital  assets  are  the  more  permanent  investments  in  the  various 
kinds  of  real  and  tangible  personal  property  and  equipment  required  in  conducting 
a  business  and  in  maintaining  its  operations. 

11.  In  an  accounting  sense,  liabilities  include  all  claims  of  creditors  and 
debts  and  obligations  owed  to  others. 

12.  Current  liabilities  are  the  obligations  and  debts  which  in  the  usual  course 
of  business  mature  and  become  due  and  payable  in  the  near  future. 

13.  Fixed  liabilities  are  long-term  debts  and  obligations  in  the  form  of 
mortgages  and  bonded  indebtedness. 


120  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

14.  Income  and  profit  and  loss  accounts  are  subdivided  and  grouped  as 
trading  accounts,  income  and  expense  accounts,  and  profit  and  loss  accounts. 

15.  A  trading  account  is  one  in  which  are  recorded  items  which  increase  or 
decrease  the  cost  of  goods  sold,  or  which  increase  or  decrease  the  income  from  sales. 

16.  An  income  account  is  one  in  which  are  recorded  the  receipts,  returns, 
proceeds,  or  income  from  a  particular  operation,  activity,  or  transaction. 

17.  An  expense  account  is  one  in  which  is  recorded  a  certain  class  of  expendi- 
tures for  the  services  and  supplies  required  in  conducting  the  operations  of  a  busi- 
ness that  are  necessarily  incurred  in  order  to  earn  incomes  and  profits,  but  from 
which  no  definite  permanent  value  is  derived. 

18.  A  profit  account  is  one  in  which  is  recorded  an  unusual,  incidental,  non- 
operating,  or  miscellaneous  increase  in  assets  which  does  not  result  from  the  regular 
income-producing  operations  of  a  business. 

19.  A  loss  account  is  one  in  which  is  recorded  an  unusual,  incidental,  or 
miscellaneous  decrease  in  assets  arising  out  of  a  non-operating  source  and  which 
results  in  a  pure  waste,  destruction,  or  forfeiture  of  capital  and  wealth. 

20.  Trading  accounts  are  divided  into  two  groups — those  affecting  the  income 
from  sales,  and  those  affecting  the  cost  of  goods  sold. 

21.  The  total,  or  gross,  sales  is  the  gross  income  from  sales,  from  which  all 
deductions  from  sales  must  be  subtracted  to  find  the  net  income  from  sales. 

22.  Deductions  from  sales  include  all  amounts  which  reduce  the  returns,  pro- 
ceeds, or  income  from  sales. 

23.  The  invoice  cost  of  goods  sold  is  the  invoice  cost  of  the  goods  on  hand 
at  the  beginning  of  a  period,  plus  the  invoice  cost  of  purchases  during  the  period, 
minus  the  invoice  cost  of  goods  on  hand  at  the  end  of  the  period. 

24.  All  deductions  from  cost  must  be  subtracted  from  and  all  additions  to 
cost  must  be  added  to  the  invoice  cost  of  goods  sold  in  finding  the  total  cost  of  goods 
sold. 

25.  Deductions  from  cost  include  all  amounts  which  reduce  the  invoice 
price  of  goods  purchased. 

26.  Additions  to  cost  are  the  trading  expenses  which  increase  the  cost  of 
goods  sold. 

27.  Trading  expenses  are  those  which  increase  the  cost  of  goods  sold  because 
they  are  incurred  directly  in  connection  with  the  buying  and  selling,  or  trading, 
operations. 

28.  Operating  expenses  are  the  general  expenses  applicable  to  and  incurred 
by  a  business  as  a  whole  and  which  therefore  cannot  properly  be  charged  against 
any  particular  department  or  operation. 

29.  Additions  to  income  are  the  non-operating,  incidental,  and  miscellaneous 
incomes  and  profits  which  are  not  earned  by  the  regular  income-producing  operations 
of  a  business. 


ELEMENTARY    ACCOUNTING  121 

30.  Deductions  from  income  are  the  non-operating,  incidental,  and  mis- 
cellaneous expenses  and  losses  which  are  not  necessarily  incurred  in  connection 
with  the  regular  income-producing  operations  of  a  business. 

31.  Gross  trading  income  is  the  profit  remaining  after  the  total  cost  of  goods 
sold  has  been  deducted  from  the  net  income  from  sales. 

32.  The  net  income  from  operations  is  the  gross  trading  income  minus 
operating  expenses. 

33.  The  total  income  from  operations  and  all  other  sources  is  the  net  income 
from  operations  plus  additions  to  income. 

34.  The  net  profit  is  the  total  income  from  operations  and  all  other  sources 
minus  the  deductions  from  income. 

35.  Profits  increase  one's  wealth — losses  decrease  it. 

36.  Profits  retained  in  a  business  increase  its  invested  capital — losses  must 
be  met  out  of  invested  capital  and  hence  decrease  it. 

37.  Profits  are  accounted  for  finally  in  increased  assets  or  in  decreased 
liabilities. 

38.  Losses  are  accounted  for  finally  in  decreased  assets  or  increased 
liabilities. 

39.  The  function  of  books  of  original  entry  is  to  provide  a  convenient  and 
efficient  method  of  classifying  and  recording  the  transactions  of  a  business  as 
they  occur  from  day  to  day,  and  to  serve  as  posting  mediums  by  means  of  which 
the  debit  and  credit  items  resulting  from  transactions  can  be  readily  transferred 
to  ledger  accounts. 

40.  When  books  are  kept  by  double  entry,  an  equality  of  debits  and  credits 
in  the  ledger  is  maintained  by  posting  all  entries  in  the  books  of  original  entry  to 
the  ledger  accounts  in  such  manner  as  to  always  offset  debit  items  with  credit 
items,  or  vice  versa. 

41.  Entries  in  books  of  original  entry  do  not  assume  the  status  of  debits  and 
credits  until  they  are  posted  to  and  appear  in  ledger  accounts. 

42.  The  purpose  of  recording  the  various  classes  of  transactions  in  separate 
books  of  original  entry  is  to  reduce  posting  to  the  minimum,  since  the  totals  of  such 
books  can  be  posted  as  offsetting  debits  or  credits  to  the  individual  items  posted 
from  them. 

43.  The  journal  is  the  book  in  which  are  recorded  the  transactions  which 
cannot  be  classified  in  other  books  of  original  entry. 

44.  Any  entry  in  a  book  in  which  transactions  are  classified  is  the  equivalent 
of  a  journal  entry  insofar  as  the  final  result  in  the  ledger  is  concerned. 

45.  No  item  should  appear  in  the  ledger  that  is  not  posted  from  some  book 
of  original  entry,  except  cross  entries  which  balance  accounts. 

46.  The  purpose  of  ledger  accounts  is  to  group  the  financial  records  of  all 
transactions  under  their  proper  classifications. 


122  ACCOUNTANCY   AND   BUSINESS   MANAGEMENT 

47.  Accounts  must  be  classified  so  that  the  balance  of  each  account  will 
show  one  definite  financial  result  and  unit  of  accounting  information. 

48.  The  only  way  to  secure  a  subtraction  in  the  ledger  is  to  record  the  item  to 
be  subtracted  on  the  opposite  side  of  either  the  same  or  another  account. 

49.  With  respect  to  the  manner  in  which  the  rules  of  debit  and  credit  apply 
to  them,  accounts  may  be  classified  as  personal  and  impersonal. 

50.  Personal  accounts  include  all  accounts  receivable  with  individuals,  firms, 
and  corporations  showing  what  they  owe  to  us,  and  all  accounts  payable  with  individ- 
uals, firms,  and  corporations  showing  what  we  owe  to  them. 

51.  Impersonal  accounts  include  all  other  asset,  liability,  capital,  income, 
profit,  and  loss  accounts. 

52.  Assets,  costs,  investments,  receipts,  expenses,  and  losses  are  always 
debits.     Liabilities,  capital,  expenditures,  incomes,  and  profits  are  always  credits. 

53.  All  expenditures  on  a  capital  asset,  whether  for  first  cost  or  for  improve- 
ments, prior  to  the  time  it  is  ready  for  use  or  becomes  productive,  or  which  increase 
its  efficiency  as  an  income-producing  factor  or  its  market  value  as  an  investment, 
should  be  charged  to  the  asset  investment  account.  All  other  expenditures  on 
a  capital  asset  are  capital  expenses. 

54.  Capital  is  treated  as  a  credit  for  bookkeeping  purposes  in  order  to  main- 
tain an  equality  between  the  debits  for  assets  and  the  credits  for  liabilities. 

55.  A  trial  balance  merely  shows  that  in  the  ledger  the  total  debits  are  equal 
to  the  total  credits,  but  it  does  not  prove  the  correctness  of  the  ledger  accounts, 
or  of  the  balances  which  compose  it. 

56.  A  supporting  schedule  or  exhibit  is  a  supplementary  statement  setting 
forth  in  detail  the  items  which  make  up  an  item  or  account  included  in  a  trial 
balance  or  statement. 

57.  The  net  profit  or  net  loss  can  be  determined  by  taking  the  difference 
between  the  capital  at  the  beginning  and  the  capital  at  the  close  of  an  accounting 
period;  that  is,  the  net  profit  or  loss  is  the  measure  of  the  increase  or  decrease  in 
net  assets  during  a  period. 

58.  The  purposes  of  closing  a  ledger  are  to  record  the  final  distribution  of  the 
net  profit  or  net  loss  in  the  proper  ledger  accounts,  and  to  eliminate  the  income 
and  profit  and  loss  accounts  as  open  accounts  in  the  ledger. 

59.  The  profit  and  loss  summary  account  is  a  recapitulation  in  the  ledger 
of  the  balances  of  all  the  income  and  profit  and  loss  accounts  which  were  included 
in  finding  the  net  profit  or  net  loss. 

60.  The  function  of  the  post-closing  trial  balance  is  to  test  the  equality  of 
debits  and  credits  in  the  ledger  after  it  has  been  closed. 


ELEMENTARY   ACCOUNTING  123 

REVIEW   EXERCISES 

Exercises  37  to  44  inclusive,  which  follow,  provide  a  test  of  the  student's 
knowledge  of  the  principles  underlying  the  classification  of  accounts  which  have 
been  presented  up  to  this  point.  A  double  sheet  of  journal  paper  and  a  double 
sheet  of  ledger  paper  will  be  required.  Allow  twenty-two  lines  for  the  cash  ac- 
count, eight  lines  for  the  purchases  account,  and  six  lines  each  for  all  other  accounts 
— one  line  for  the  heading  and  five  fines  for  the  entries. 

R.  E.  Wood  began  business  as  a  hardware  merchant  on  November  1.  He  did 
not  keep  a  regular  set  of  books.  All  of  his  records  of  the  business  he  transacted 
to  December  31  are  in  the  form  of  memorandums  he  made  from  time  to  time, 
bills  he  received  for  purchases  of  merchandise  and  bills  for  expense  items,  memo- 
randum charges  to  customers  for  merchandise  sold,  and  his  check  book  stubs 
showing  the  records  of  all  cash  deposits  and  payments.  On  December  31  it  is 
necessary  for  him  to  ascertain  what  his  profit  or  loss  has  been  for  the  two  months 
he  has  been  in  business  so  he  can  prepare  his  income  tax  return.  He  also  wishes 
to  determine  the  financial  condition  of  his  business  on  this  date  because  he  intends 
to  open  a  set  of  books  at  the  beginning  of  business  for  the  new  year. 

The  student  has  just  been  employed  as  his  bookkeeper.  It  is  first  necessary 
to  set  up  accounts  which  will  properly  record  his  transactions  for  November  and 
December,  from  which  to  prepare  an  income  and  profit  and  loss  statement  and  a 
statement  of  assets  and  liabilities  as  of  December  31.  As  it  will  be  somewhat 
difficult  to  record  his  transactions  in  chronological  order,  all  entries  are  to  be 
journalized  and  entered  under  date  of  December  31,  and  then  to  be  posted  to  the 
ledger. 

exercise  37 

Mr.  Wood  reports  that  when  he  began  business  on  November  1  he  invested 
$10,000.00  in  cash,  a  stock  of  merchandise  he  had  purchased  at  auction  on  October 
20  which  cost  him  $2,750.00,  office  and  store  furniture,  fixtures,  and  equipment 
which  were  also  purchased  at  the  same  auction  sale  for  a  price  of  $700.00,  and  a 
new  automobile  truck  which  cost  $1,500.00,  that  was  delivered  to  him  on  October  29. 
On  that  date  he  issued  a  check  for  $1,200.00  to  apply  on  the  purchase  price.  This 
payment,  however,  was  not  made  out  of  the  funds  he  invested  in  his  business, 
but  from  other  money  he  had  in  his  possession  at  that  time.  On  November  1  he 
issued  a  60  day  note  for  $300.00,  dated  November  1,  with  interest  at  6% 
payable  at  maturity,  for  the  balance  of  the  purchase  price  of  this  delivery  equip- 
ment, the  note  to  be  paid  from  tho  funds  of  his  business  when  it  matured. 

Prepare  a  journal  entry  to  record  the  assets  invested.  Then  prepare  another 
entry  to  record  any  claims  against  these  assets.  Next,  open  the  ledger  accounts 
required  and  post  the  entries. 


124  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

EXERCISE    38 

Mr.  Wood  closed  a  deal  on  October  20  for  the  purchase  of  a  business  property 
located  at  the  corner  of  Main  and  Oak  Streets.  It  is  known  as  32  Main  Street. 
The  property  consists  of  a  lot  having  a  frontage  of  40  feet  on  Main  Street  and  a 
depth  of  100  feet  on  Oak  Street,  improved  by  a  two-story  brick  store  and  warehouse, 
building  40  feet,  wade  and  70  feet  deep.  The  purchase  price  of  the  building  was 
$7,000.00  and  the  lot  cost  $4,000.00. 

Mr.  Wood  did  not  take  title  to  the  property  until  November  1,  on  which 
date  he  issued  a  check  for  $5,000.00  on  the  checking  account  of  his  business  to  apply 
on  the  purchase  price,  and  executed  a  mortgage,  dated  November  1,  in  the  amount 
of  $6,000.00,  bearing  interest  at  the  rate  of  6%  per  annum,  for  the  balance.  The 
former  owner  of  the  property  had  already  paid  the  taxes  for  the  current  year, 
which  amounted  to  $261.18.  Mr.  Wood  accordingly  issued  his  check  to  him  for 
$43.53,  which  amount  was  one-sixth  of  the  year's  taxes  applicable  to  the  months 
of  November  and  December.  He  also  issued  a  check  for  $142.52  to  pay  the  bill 
for  examining  the  title,  recording  the  deed,  arranging  for  the  mortgage,  and  other 
expenses  incurred  on  the  property  prior  to  the  time  he  began  to  use  it  for  business 
purposes. 

exercise  39 

Among  the  furniture  and  fixtures  which  Mr.  Wood  purchased  at  auction  was 
a  second-hand  typewriter  for  which  he  paid  $28.00.  He  traded  this  machine  in  on 
November  3  on  the  purchase  of  a  new  machine,  the  price  of  which  was  $87.50.  He 
was  allowed  $20.00  for  the  old  machine  and  issued  his  check  to  the  typewriter 
company  for  the  difference,  $67.50. 

Note:  Losses  similar  to  the  loss  between  the  cost  price  of  the  old  typewriter 
and  the  price  received  when  it  was  disposed  of  are  unusual  or  non-operating  losses 
in  the  sense  that  they  result  from  transactions  outside  of  those  from  which  the 
regular  or  operating  income  of  the  business  is  derived.  They  are  referred  to  as 
.incidental  or  miscellaneous  losses.  Consequently,  they  should  be  accounted  for  in  a 
separate  account  under  the  title  of  "  Miscellaneous  Losses."  The  losses  charged 
to  this  account  should  be  listed  separately  in  the  income  and  profit  and  loss  state- 
ment with  the  other  "deductions  from  income."  Likewise,  unusual  or  non- 
operating  profits  such  as  the  profit  on  the  sale  of  real  estate  reported  in  the  next 
transaction  are  not  operating  profits.  They  are  incidental  or  miscellaneous  profits, 
and  should  be  accounted  for  in  a  separate  account  under  the  title  of  "Miscellaneous 
Profits."  They  should  be  listed  separately  in  the  statement  with  the  other 
"additions  to  income." 

On  November  15  he  sold  the  rear  part  of  his  lot  for  $1,500.00,  accepting  at  the 
time  the  transaction  was  consummated  a  cjjeck  for  $500.00  and  .two  notes  for  $500.00 


ELEMENTARY   ACCOUNTING  125 

each.  Both  notes  were  dated  November  15,  one  payable  in  30  days  and  the  other 
in  60  days  with  interest  at  6%  payable  at  maturity.  The  cost  of  that  part 
of  the  lot  disposed  of  was  $1, 200.00.  The  purchaser  intends  to  erect  a  building  in 
which  to  conduct  a  drug  store. 

On  October  21  Mr.  Wood  employed  a  contractor  to  build  a  partition  on  the 
second  floor  so  as  to  make  a  room  for  a  photographer's  studio.  He  leased  the 
space,  the  tenant  taking  possession  on  November  1.  The  cost  of  this  partition  and 
of  other  alterations  and  repairs  about  the  building  required  to  put  it  in  first-class 
condition  was  $280.00,  for  which  Mr.  Wood  issued  his  check  to  the  contractor  on 
November  5. 

EXERCISE    40 

An  analysis  of  Mr.  Wood's  merchandising  transactions  for  the  two  months 
he  has  been  in  business  discloses  the  following  facts  and  figures: 

The  bills  for  merchandise  purchased  amount  to  $2,147.16.  All  of  this  mer- 
chandise was  bought  on  open  account.  For  one  reason  or  another  he  returned  for 
credit  merchandise  included  in  these  purchases  amounting  to  $72.23,  and  received 
rebates  and  allowances  amounting  to  $13.52.  He  also  took  from  his  stock  of  mer- 
chandise tools  and  other  articles  for  use  in  the  store  and  warehouse  which  cost  $32.90. 

Note:  Open  an  accounts  receivable  account  and  an  accounts  payable  account 
in  which  to  record  all  debits  and  credits  to  trade  debtors  and  trade  creditors 
respectively. 

Mr.  Wood  billed  all  goods  sold  to  customers  on  open  account  in  duplicate, 
and  retained  the  duplicate  copies  as  his  records  of  the  transactions.  As  his  custom- 
ers paid  him  he  marked  the  carbon  copies  "Paid."  His  sales,' as  shown  by  these 
carbon  copies,  total  $2,714.88.  His  customers  returned  goods  amounting  to 
$15.80,  for  which  he  allowed  credit,  and  he  rebated  various  sums  to  his  customers 
on  sales  amounting  to  $22.37. 

His  inventory  of  unsold  merchandise  on  hand  on  'December  31  taken  at 
invoice  cost  amounts  to  $3,267.28. 

exercise  41 

Since  he  began  business  on  November  1,  Mr.  Wood  has  deposited  all  cash 
received.  He  classified  his  deposits  when  entering  them  on  the  stub  of  his  check 
book  so  as  to  show  the  amounts  received  in  settlement  of  accounts  receivable,  the 
proceeds  from  cash  sales,  the  income  from  rentals,  etc.  An  analysis  of  these 
deposits  shows  that  he  received  in  settlement  of  customers'  accounts  the  sum 
of  $1,842.55.  Included  in  this  amount  was  an  item  of  $1.36  for  interest  on  a 
past  due  account.     The  deposits  of  receipts  from  cash  sales  amounted  to  $312.18. 

In  drawing  a  check  in  payment  of  one  of  his  bills  for  merchandise  purchased, 


126  ACCOUNTANCY   AND    BUSINESS   MANAGEMENT 

he  transposed  the  figures  on  the  bill  from  $123.50  to  $132.50.  His  creditor  re- 
funded the  overpayment  by  a  check  for  $9.00,  which  was  deposited.  He  also 
made  two  deposits  of  $35.00  each  for  the  checks  received  in  payment  of  the  rent  of 
the  studio  for  November  and  December.  He  received  a  check  for  $5.44  from  the 
railroad  company  for  an  overpayment  on  a  freight  bill  on  goods  purchased  due  to 
a  mistake  in  the  rate  assessed  on  the  shipment,  which  was  also  deposited. 

On  December  15  he  received  a  check  for  $502.50  in  payment  of  the  first  note 
he  accepted  from  the  purchaser  of  the  rear  part  of  his  lot.  This  check  included 
the  interest  on  the  note  for  30  days.    This  check  was  deposited  also. 

EXERCISE  42 

An  analysis  of  Mr.  Wood's  cash  payments,  exclusive  of  those  previously  re- 
ported, as  prepared  from  the  stubs  in  his  check  book  discloses  the  following  data: 

During  November  and  December  his  payments  in  settlement  of  sums  owed  to 
his  creditors  amounted  to  $928.47.  On  December  30  he  issued  a  check  for  $303.00 
in  payment  of  the  note  he  gave  on  November  1  for  the  balance  of  the  purchase 
price  of  his  truck.  The  check  included  the  interest  on  the  note  for  60  days.  Dur- 
ing the  period  he  paid  freight  bills  on  goods  purchased  amounting  to  $97.84.  He 
issued  two  checks  in  favor  of  himself  for  $125.00  each  for  his  salary  for  November 
and  December. 

On  November  3  he  issued  a  check  for  $75.00  in  payment  of  a  bill  for  repairing, 
painting,  and  varnishing  the  furniture  and  fixtures  he  purchased  at  auction.  These 
permanent  improvements  were  necessary  to  put  the  equipment  in  good  condition. 
The  work  was  completed  prior  to  the  time  he  began  to  transact  business.  His 
bills  for  boxing,  packing,  and  shipping  materials  and  store  and  warehouse  supplies 
paid  during  the  two  months  amount  to  $52.60.  On  November  8  he  issued  a 
check  for  $43.25  in  payment  of  a  bill  for  repairing  the  plumbing  and  installing  new 
plumbing  and  fixtures  in  the  building.  These  were  permanent  improvements  re- 
quired to  put  the  plumbing  in  first-class  condition. 

Mr.  Wood  employs  a  warehouseman  and  truck  driver  whose  time  is  fully 
occupied  in  handling  incoming  and  outgoing  stock  in  the  warehouse.  His  wages 
for  the  two  months  were  $180.00.  He  also  employs  a  sales  clerk  to  wait  upon 
customers  in  the  store  and  to  assist  him  in  the  general  conduct  of  the  business. 
His  salary  was  $162.00  for  the  period.  On  December  20  a  carpenter's  bill  for  $5.80 
for  minor  repairs  to  different  parts  of  the  building  was  paid  by  check.  In  filling 
an  order  the  clerk  dropped  a  hammer  and  broke  a  plate  glass  top  in  a  show  case. 
It  cost  $11.50  to  replace  it,  which  was  paid  by  check.  On  November  2  he  insured 
the  building  against  fire,  the  face  value  of  the  policy  being  $7,000.00.  He  issued 
a  check  for  $32.90  in  payment  of  the  premium  on  the  policy.  He  paid  bills  amount- 
ing to  $123.84  for  office  supplies  and  stationery,  electric  light,  coal,  license  fees 
for  the  truck,  gasoline,  oils,  and  similar  expenses. 


ELEMENTARY   ACCOUNTING  127 

On  December  31  he  made  a  payment  of  $1,000.00  on  the  mortgage  covering 
his  real  estate  to  retire  a  part  of  the  principal.  He  included  in  his  check  the  accrued 
interest  from  November  1  to  December  31  on  the  full  amount  of  the  mortgage,  his 
check  amounting  to  $1,036.00.  The  balance  of  cash  shown  by  the  check  book  is 
$4405.92. 

EXERCISE  43 

In  addition  to  the  above  he  had  the  following  transactions  during  the  period. 
On  November  22  he  accepted  a  draft  drawn  on  him  by  a  creditor  at  60  days  after 
sight  dated  November  20  for  $224.58,  the  amount  of  a  bill  of  merchandise  pur- 
chased.    He  intends  to  pay  this  draft  at  maturity. 

One  of  his  customers  who  owed  him  $103.95  for  a  bill  which  matured  on 
December  15  could  not  pay  the  bill  at  that  time,  and  Mr.  Wood  accepted  his 
30  day  note  dated  December  15  with  interest  at  6%  for  the  amount  of  the  bill. 

EXERCISE  44 

After  all  the  transactions  in  Exercises  37  to  43,  inclusive,  have  been  entered 
and  posted,  take  a  trial  balance  and  then  prepare  an  income  and  profit  and-  loss 
statement.  Then  close  the  income  and  profit  and  loss  accounts  into  the  profit 
and  loss  summary  account. 

Mr.  Wood  states  that  he  wants  the  profit  he  made  on  the  sale  of  the  lot  plus 
such  other  part  of  his  profit  from  other  sources  credited  to  his  capital  account  as 
to  make  an  investment  of  an  even  $15,000.00  with  which  to  start  business  at  the 
beginning  of  the  new  year.  The  remainder  of  his  profit  is  to  be  credited  to  his 
personal  account  subject  to  withdrawal  whenever  he  may  wish  to  draw  it.  Make 
the  entries  to  record  this  distribution  of  profits  and  post  them  to  the  ledger. 

Prepare  a  statement  of  assets,  liabilities,  and  capital  as  of  December  31, 
showing  in  the  capital  section  the  distribution  of  profit  which  has  been  ordered. 

Next  prepare  a  trial  balance  from  the  ledger  as  it  stands  after  the  income  and 
profit  and  loss  accounts  have  been  closed.  Such  a  trial  balance  is  called  a  post- 
closing  trial  balance.  It  includes  only  the  asset,  liability,  and  capital  accounts. 
Its  purpose  is  to  make  certain  that  the  ledger  is  in  balance  after  it  has  been  closed 
for  a  fiscal  period  and  before  any  entries  for  the  next  fiscal  period  have  been  posted. 

On  January  1  Mr.  Wood  drew  a  check  in  his  favor  for  that  part  of  his  profit 
that  was  credited  to  his  personal  account.     Make  the  journal  entry  to  adjust. 

Mr.  Wood  has  purchased  a  complete  set  of  books  in  winch  to  keep  the  accounts 
of  his  business  for  the  ensuing  year:  Set  up  the  journal  entry  that  would  be  re- 
quired to  open  his  new  books  and  ledger  at  trib  beginning  of  business  on  January  1. 
Then  make  the  adjusting  entry  for  the  inventory  of  merchandise  of  December  31. 

Note  to  Teacher:  Accruals  are  not  to  be  taken  into  consideration  in  working 
exercises  37  to  44  inclusive. 


INDEX  TO  PART  ONE 


A 

Acceptance 61 

Accounts: 

Capital 55 

Capital  Investment 89,  90 

Cash 25,  37,  69-72 

Creditors' 50,  51 

Debtors' 49 

Expense 37,  85 

Expense  &  Income,  relating  to  Capital 

Assets 90,  94,  95,  96 

Fiscal 110 

Impersonal 24 

Inventory 78 

Interest  Expense 87 

Interest  Income 87 

Investment,  Capital 89,  90 

Merchandise , 72 

Notes  Payable 67-69 

Notes  Receivable 64-66 

Ownership 55 

Owner's  Personal 58,  il4-117 

Payable 18,  48,  50 

Personal 18,  22,  48,  52 

Balance  of • 22 

Debiting  and  Crediting  of 20,  21 

Mixed 24,  37 

Ruling  of 22,  52-54 

Property  Investment 89 

Proprietor's  Capital 55,  114,  115,  116 

Net  Profit  Transferred  to 114 

Personal    Account    Balance    trans- 
ferred to 115,  117 

Proprietor's  Personal 58, 114-117 

Balance  Closed  into  Capital  Account 

114,  115,  117 

Profit  &  Loss  Summary 110,  112,  114 

Purchases 73,  76 

Analyzed 100 

Real  Estate  Expense 94 

Real  Estate  Income 95-96 

Real  Estate  Investment 91 

Receivable 18,  48,  49 

Sales 24,  37,  76 

Analyzed 100 

Warehouse  Expense 82 

Additions  to 

Cost 76,80,82 

Invoice  Cost  of  Goods  Sold 76 

Income 87,  95,  102 

Analysis  of 

Cash  Payments. 11 

Cash  Receipts 9 

Model  Set 14-16 

129 


Posting 19 

Purchases  Book 3  4 

Sales  Book ' ' ' '     ]  7'  g 

Assets  ' 

Capital  Assets 90,  103 

Current  Assets 52!  105 

Fixed  Capital  Assets 90,  105,'  106 

Floating  Assets 105 

Liquid  Assets ...    .   105 

Net  Assets 31,  103,'  104,  105 

Quick  Assets 105 

Assets  and  Liabilities 

Statement  of 31,  103,  109 

Construction  and  Interpretation  of  105-109 

B 

Bill,  or  Invoice 2  5 

Due  dates  of "  '  5'  g 

Books,  Closing  the io9   117 

Book  of  Final  Entry,  Defined .'    18 

Book  of  Original  Entry,  Defined 18,  96 

Business  Transaction,  Defined 48 

C 

Capital 31,  32,  106 

Invested  Capital 55 

Net  Capital 3*1,  103 

Capital  Account 55 

Proprietor's  Capital  Account.  .114,  115,  116 

Net  Profit  transferred  to 114 

Personal    Account    Balance    trans- 
ferred to 115, 117 

Capital  Assets 90,  91,  92,  103 

Expense  &  Income  Accounts,  relating 

to 90 

Fixed  Capital  Assets 105,  106 

Capital  Expense 87,  103 

Capital  Income 87,  103 

Capital  Investment 31 

Capital  Investment  Accounts 89 

Closing  of 93 

Canceling  Items 21,  22 

Cash,  defined 69 

Cash  Account 25,  37,  69-72 

Cash  Book,  Payments 10,  71 

Analysis  of 1 1 

Cash  Book,  Receipts.  8,  14,  15,  38,  39,  70,  71 

Analysis  of 9,  10 

Cash  Sales 78 

Charges,  Fixed i(g 

Classification  of  Transactions 12,  33,  96 

Classified  Original  Entries 12,  36 

Closing  and  Adjusting  Entries 110-117 

Closing  the  Books 109-117 


130 


INDEX   TO   PART   ONE 


Closing  the  Ledger 110-117 

By  Compound  Journal  Entry  ....   116,  117 
Comparison   of   Classified   and   Journal 

Entries 36,46 

Construction  and  Interpretation  of 
Statement  of  Assets,  Liabilities  and 

Capital 105-109 

Construction  and  Interpretation  of 
Income  and  Profit  and  Loss  State- 
ment    100-103 

Contract,  defined 48 

Cost  of  Goods  Sold 30 

Net  Cost  of  Goods  Sold 43 

Total  Cost  of  Goods  Sold 102 

Cost  of  Purchases,  deductions  from 73 

Creditor,  defined. . . .  • 48 

Accounts  with  Creditors 50 

Current  Assets 52,  105 

Current  Liabilities 52,  105 

D 

Debit  and  Credit 20 

Debits  and  Credits,  Equality  of 26-28 

Debtor,  defined 48 

Accounts  with  Debtors 49 

Debts 48 

Deductions  from  Cost  of  Purchases 73 

Deductions  from  Income 87,  94,  103 

Deductions  from  Sales 76-78,  100 

Discount  and  Interest 86 

Drafts,  definition  of 60 

Acceptance  of 61 

Acceptor  of 61 

Date  of  Maturity  of 61 

Drawee  of 60 

Drawer  of 60 

Endorsement  of 62 

Sight  Drafts 61 

Time  Drafts 61 

Transfer  of 62 

Drayage  Charges 80 

E 

Endorsement 62,  63 

Endorser 62 

First  Endorser 62 

Second  Endorser 62 

Entries,  Closing  and  Adjusting 110-117 

Errors  in  taking  Trial  Balance. 98 

Expense  Account 37,  85 

Expense  and  Income  Accounts  relating 

a  to  Capital  Assets 90,  94,  95,  96 

Expense  Charges 80 

Expenses 38,  44,  84 

Capital  Expenses 103 

General  Expenses 44 

Non-operating  Expenses 103 

Non- trading  Expenses 102 


Operating  Expenses 102 

Trading  Expenses 102 

F 

Final  Entry,  Book  of 96 

Financial  Condition 105 

Financial  Transaction,  defined 48 

Fiscal  Accounts 110 

Fixed  Capital  Assets  ....  90,  91,  92,  105,  106 

Fixed  Charges 102 

Fixed  Liabilities 105 

Floating  Assets 105 

F.o.b.  Delivery  Point 80 

F.o.b.  Shipping  Point 80 

Freight,  Expense  and  Drayage  Charges    80 

Freight  In  Account 80 

Freight  Out  Account 80 

Function  of  Income  and  Profit  and  Loss 
Accounts 109 

G 

General  Expenses 44,  84 

Goods  Sold 

Invoice  Cost  of 73,  100 

Net  Cost  of 44 

Net  Invoice  Cost  of 74,  102 

Total  Invoice  Cost  of 74, 100 

Total  Cost  of 76,  83,  102 

Gross  Profits 32 

Gross  Sales 100 

Gross  Trading  Income 102 

Gross  Trading  Loss 30,  45 

Gross  Trading  Profit 30,  44,  83,  102 

Grouped  Accounts 98 

I 

Impersonal  Accounts 24 

Debiting  and  Crediting  of 25 

Income 

Additions  to 103 

Capital  Income 103 

Deductions  from 103 

From  Sales 30,  76,  100 

Gross  Trading 102 

Net  Income 103 

Non-operating  Incomes 102,  103 

Statement  of 30,  43 

Total  from  operations   and  all  other 
sources 103 

Income  and  Profit  and  Loss  Accounts, 
Function  of 109,  110 

Income  and  Profit  and  Loss  Statement 

30,  43,  99-103 

Analysis  of 43 

Construction    and    Interpretation    of 

100-103 
Illustrations  of 20,  101 


INDEX  TO   PART   ONE 


131 


Reconciliation  of  with  Statement  of 
Assets,  Liabilities,  &  Capital  108-110 
Incoming  Freight,    Express   and   Dray- 
age  Charges 80 

Interest  and  Discount 86 

Interest  Bearing  Note 87 

Interest  Expense  Account 87 

Interest  Income  Account 87 

Interest  Paid 86,  87 

Interest  Received 86,  87 

Insolvency,  Net 103 

Inventory 

At  Beginning  of  Fiscal  Period 100 

At  Close  of  Fiscal  Period 100 

Inventory  Account -. . . .     78 

Invested  Capital 55 

Invoice  Cost  of  Goods  Purchased 73 

Invoice  Cost  of  Goods  Sold 73,  110 

Net  Invoice  Cost  of 74,  102 

Total  Invoice  Cost  of 74,  100,  102 

J 

Journal 33 

Analysis  of 34,  35 

Entries  in 34 

Posting  from 35 

Journalizing,  defined 36 

L 

Ledger,  Book  of  Final  Entry 96 

Ledger,  Closing  the 110-117 

By  Compound  Journal  Entry 116-117 

Ledger  defined 18 

Liabilities 29,  55,  106 

Current 105,  106 

Fixed 105 

Net 103 

Liquid  Assets 105 

M 

Maturity,  Date  of 61 

Medium  of  Exchange,  defined 60 

Merchandise  Accounts 72 

Merchandise  Inventory   defined 68 

Model  Set 12-15 

N 

Net  Assets 103,  104,  106 

Net  Capital 103 

Net  Cost  of  Goods  Sold 44 

Net  Income 103 

From  Sales 100 

From  Operations 102 

Net  Insolvency 103 

Net  Invoice  Cost  of  Goods  Sold 74,  102 

Net  Invoice  Cost  of  Merchandise 74 

Net  Liabilities 103 

Net  Loss 45 


Non-operating  Expenses 103 

Non-operating  Incomes 102,  103 

Notes 

Amount  of 87 

Date  of  Maturity  of 61 

Endorsement  of 62 

Face  of 87 

Illustration  of 60 

Maker  of 60 

Payee  of 60 

Proceeds  of 87 

Negotiable  Instruments 61 

Transfer  of 62 

Notes  and  Drafts. 60-63 

Notes  Payable  Account 67-69 

Notes  Receivable  Account 64-67 

Notes  Receivable  and  Notes  Payable. .  62,  63 

O 

Obligations 48 

Operating  Expenses 102 

Operations,  Net  Income  from 102 

Original  Entry,  Book  of 18,  96 

Ownership  Accounts 55 

Owner's  Personal  Account 58 

Outgoing  Freight,  Expense  and  Drayage 
Charges 80 

P 

Personal  Accounts 18,  20,  22,  48,  52 

Balance  of 22 

Debiting  and  Crediting  of 20,  21 

Mixed 24,  37 

Ruling  of 22,  52-54 

Posting 18,  96 

Analysis  of 19 

From  Cash  Book 20 

From  Purchases  Book 18 

From  Sales  Book 18 

Procedure  in 22 

Principles,  Recapitulation  of 119-123 

Profit 

Gross 32 

Gross  Trading 102 

Net 34,  44,  103 

Profit  and  Loss  Statement 43 

Illustration  of 44 

Profit  and  Loss  Accounts,  Function  of. .  109 

Profit     and     Loss     Summary     Account 

110,  112, 114 

Property  Investment  Accounts 89 

Property  Investments 
Expense  and  Income  Accounts  relating 
to 90 

Proprietor's  Capital  Account  55,  114,  115,  116 

Net  Profit  transferred  to 114 

Personal  Account  Balance  trans- 
ferred to 114,  117 


132 


INDEX   TO   PART   ONE 


Proprietor's  Fersonal  Account 58 

Balance  Closed  into  Capital  Account 

114,  115,  117 

Proprietorship 107,  108 

Purchases 54 

Deductions  from 43 

Rebates  and  Allowances  on 44,  102 

Recording 1 

Returned 43 

Total  or  Gross 43 

Purchases  Account 73,  76 

Analyzed 100 

Purchases  Book 2 

Analysis  of 3,  4 

Q 

Quick  Assets 105 

R 

Real  Estate  Expense  Account 94 

Real  Estate  Income  Account 95,  96 

Real  Estate  Investment  Account 91 

Rebates  and  Allowances 

On  Purchases 44,  102 

On  Sales 43,  100 

Recapitulation  of  Principles 119-122 

Reconciliation  of  Statements 108-110 

Recording  Cash  Payments 10 

Recording  Cash  Receipts 8 

Recording  Purchases 1 

Recording  Sales 5 

Resources 105 

Resources  and  Liabilities,  Statement  of  105 

Returned  Sales 100 

Review  Questions.  / 12,  32 

S 

Sales 4 

Deductions  from 43,  100 

Income  from *. 30,  43,  76 

Net  Income  from 43,  73,  100 

Rebates  and  Allowances  on 43,  100 

Returned 43,  100 

Total  or  Gross 43,  76,  100 


Sales  Account 24,  37,  76 

Analyzed 100 

Sales  Book 5 

Analysis  of 7,  8 

Schedule,  Supporting. .'. 98 

Sight  Draft 61 

Statement  of  Assets  and  Liabilities 31 

Illustration  of 31 

Statement    of    Assets,    Liabilities,   and 

Capital 103-109 

Illustration  of 104 

Construction    and    Interpretation    of 

105-107 

Reconciliation  of 108-110 

Statement  of  Financial  Condition 105 

Statement  of  Income  and  Profit  &  Loss 

30,  43,  99-103 

Analysis  of 43 

Illustration  of 30,  44,  101 

Reconciliation  of 108-110 

Statement  of  Resources  &  Liabilities 105 

Supporting  Schedule 98 

T 

Three  Party  Draft 61 

Time  Draft 61 

Total  Cost  of  Goods  Sold 76,  83,  102 

Total  Invoice  Cost  of  Goods  Sold. ...  74,  100 
Total  Invoice  Cost  of  Merchandise. .  73,  100 
Total  Income  from  Operations  and  all 

other  sources 103 

Total  or  Gross  Sales 100 

Trading  Expenses. .  .• 80,  82,  102 

Transaction,  defined 48 

Trial  Balance 29,  97,  98 

Accounts  In,  Grouped 98,  99 

Defined 27,  97 

Errors  in 98 

When  Taken 97 

W 

Warehouse  Expense  Account 82 

Warehouse  Expenses 82 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


Form  L9-32m-8,'58(5876s4)444 


a  ,  ri  JfiS&n  AdminiBtration 


.  '     i~«,  ©a    California 


L  005  068  620  3 


UNIVERSITY  OF  CALIFORNIA, 
LIBRARY, 

,U>S  ANGELES.  CALIF. 


